Question

What is the fundamental economic reason that total savings fail to rise when everyone in the economy tries to save more?

Options

• The fall in aggregate demand reduces equilibrium income, and as income falls, the ability to save also falls

• The multiplier chain becomes a divergent series that eliminates savings

• Autonomous expenditure rises automatically to offset the extra saving

• Higher saving raises aggregate demand and thereby raises income

Answer 1

When all people try to save more, consumption is cut, aggregate demand falls, and equilibrium income falls through the multiplier chain. Since saving is done out of income, the lower income reduces the ability to save, so aggregate savings stay at 10 or may even decrease.