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Assumptions of Keynes Psychological Law of Consumption

Keynes Psychological Law of Consumption is based on the following three assumptions:

1. Stable Institutional and Psychological Factors

Keynes assumes that only income changes, whereas other factors like the consumption habits of the people, the pattern of the income distribution, the price movement, growth of the population, etc. remain constant. Since these factors can remain more or less stable only in the short period, the law holds true only in the short period. Constancy of these factors is responsible for stable consumption function.

2.Normal conditions

The law assumes away the abnormalities like war, revolution, depression, hyper inflation, etc. Under normal conditions only, the law hold good.

3. Laissez Faire Economy

The law assumes the existence of a capitalistic laissez-faire free market economy, where people are free to spend their increased income. The law does not apply in a socialist or regulated economy, where the state interferes in the consumption and production activities.

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