Question

Paradox of Thrift implies:

• A. If all the people of the economy increase the proportion of income they save, the total value of investment in the economy will not increase, it will either decline or remain unchanged.
• B. If all the people of the economy increase the proportion of income they spend, the total value of savings in the economy will not increase, it will either decline or remain unchanged.
• C. If all the people of the economy decrease the proportion of income they save, the total value of savings in the economy will not increase, it will either decline or remain unchanged.
• D. If all the people of the economy increase the proportion of income they save, the total value of savings in the economy will not increase, it will either decline or remain unchanged.

Answer 1

The Correct Option is D

The Paradox of Thrift means that when everyone tries to save more, aggregate demand falls, leading to a potential drop in total savings and income.

Answer 2

The Paradox of Thrift refers to a concept in economics where, although individuals may try to save more money during uncertain times, this collective effort can lead to unintended consequences. Specifically, when everyone increases their savings simultaneously, it can result in a decrease in aggregate demand.

As people save more, they reduce their consumption of goods and services, which leads to a decline in overall demand in the economy. Since aggregate demand is a key driver of economic activity, this reduction can result in a slowdown in production, lower income levels, and potentially an increase in unemployment.

Interestingly, the paradox occurs because the reduction in demand can lead to a fall in total income and savings, counteracting the initial intention of saving more. If incomes fall, people may not be able to save as much as they had planned, thus resulting in lower savings overall. This highlights the potential conflict between individual saving behavior and the broader economic outcome.

The Paradox of Thrift illustrates how individual actions that seem rational on their own can have negative effects on the economy as a whole, particularly during times of economic downturn or recession.