Question

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. This result is known as ......

• A. Multiplier Mechanism
• B. Paradox of Thrift
• C. Deficient Demand
• D. Investment

Hint:

Keynes stressed that aggregate demand drives the economy. Saving more individually may seem rational, but collectively it can harm national income.

Answer 1

The Correct Option is B

Step 1: Define the paradox.
The Paradox of Thrift, proposed by Keynes, states that when individuals collectively try to save more, total savings in the economy may not rise.
Step 2: Reasoning.
- Higher savings → lower consumption → lower aggregate demand.
- Lower demand reduces output and income → total savings do not increase.
Step 3: Eliminate other options.
- (A) Multiplier → explains how investment increases output by multiple.
- (C) Deficient demand → general situation of insufficient demand.
- (D) Investment → refers to capital expenditure, not paradox.
Final Answer: \[ \boxed{\text{Paradox of Thrift}} \]