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

Question

Quizplus · Accepted Answer

The paradox of thrift suggests that when everyone tries to save more during a recession, aggregate demand falls, leading to lower total savings in the economy because of reduced income and production.

Which of the Following Illustrates the Paradox of Thrift