Question

Which of the following points are related to the 'Paradox of Thrift'? 

Options

• Paradox of thrift refers to a situation in which people tend to save more money, thereby leading to a fall in the savings of the economy as a whole

• When everyone increases his/her saving income proportion i.e. MPS (s), then, the aggregate demand will fall as consumption decreases.

• This concept was suggested by Keynes wherein increased saving at individual levels will gradually lead to the slowdown of economy in terms of circular flow of income.

• All of the above

Answer 1

All of the above

Explanation:

The paradox of thrift is a situation in which people tend to save more money, resulting in a decrease in the economy's overall savings. To put it another way, when everyone increases his or her saving-income share, i.e. MPS (s), aggregate demand falls and consumption falls. This will result in a reduction in employment and income levels, as well as a reduction in total savings for the economy. This is a hypothesis proposed by Keynes, according to which more individual savings will eventually slow the economy in terms of circular income flow.