Which of the following illustrates the paradox of thrift?
A) Consumer uncertainty causes people to save less;consumption rises;equilibrium income and production drop;savings drop because income is lower.
B) Consumer uncertainty causes people to save more;consumption drops;equilibrium income and production drop;savings drop because income is lower.
C) The government encourages saving by raising interest rates;higher interest rates reduce investment spending,which lower equilibrium income and production drop;savings drop because income is lower.
D) As businesses save more,interest rates fall,thus reducing household savings.

Question

Quizplus · Accepted Answer

The paradox of thrift is the idea that when individuals save more, it reduces aggregate demand and results in lower economic growth. Choice B illustrates this paradox as increased saving leads to a decrease in consumption and equilibrium income and production, ultimately resulting in a decrease in savings due to lower income.

Which of the Following Illustrates the Paradox of Thrift