Question

According to the paradox of thrift, if people in an economy increase their savings excessively, it may lead to:

• A. Rise in national income
• B. Increase in employment
• C. Fall in aggregate demand
• D. Increase in exports

Hint:

The "Paradox" part is that individual "thrift" (virtue) becomes a collective "vice" for the economy. One person's spending is another person's income!

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
The "Paradox of Thrift" is a Keynesian economic theory. It suggests that while saving is good for an individual, if everyone in an economy tries to save more at the same time, it can harm the economy as a whole.

Step 2: Detailed Explanation:
The logic follows a chain reaction: 1. People save more $\rightarrow$ They spend less. 2. Less spending $\rightarrow$ Fall in Aggregate Demand. 3. Fall in demand $\rightarrow$ Lower production and lower business income. 4. Lower income $\rightarrow$ Eventually leads to lower total savings in the economy, even though people tried to save more.

Step 3: Final Answer:
Excessive saving leads to a fall in aggregate demand.