Psychological law of consumption is given by:

Question

Accepted Answer

The correct option is 4:
The Psychological Law of Consumption is one of the most fundamental principles of Keynesian economics, introduced by John Maynard Keynes in his seminal work, The General Theory of Employment, Interest and Money (1936). This law states that when aggregate income increases, consumption expenditure also increases, but by a smaller amount. In simpler terms, as people get richer, they spend a smaller proportion of their additional income and save a larger proportion. This principle is crucial because it forms the basis for the concept of the Multiplier and explains how aggregate demand and national income are determined in the short run. Therefore, the consumption function and its underlying psychological law are central to Keynes's macroeconomic framework.

The incorrect option is 1:
Milton Friedman is known for the Permanent Income Hypothesis (PIH), a different theory of consumption that posits consumption is related not to current income but to long-term or "permanent" income expectations. Friedman's work is a critique and alternative to the simple Keynesian consumption function.

The incorrect option is 2:
Arthur Cecil Pigou was a neoclassical economist primarily known for his work on welfare economics, externalities (Pigouvian taxes), and the "Pigou effect" (real balance effect) related to changes in price levels affecting consumption. He did not formulate the Psychological Law of Consumption.

The incorrect option is 3:
James Tobin was an American economist who contributed significantly to Keynesian and post-Keynesian macroeconomics, particularly in the fields of investment and finance (e.g., Tobin's Q theory) and portfolio selection. While he worked within the macroeconomic tradition influenced by Keynes, he is not credited with proposing the basic Psychological Law of Consumption.