To understand the paradox of thrift, it is necessary to assume that investment is unrelated to income.

Question

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The paradox of thrift suggests that an increase in saving (or thrift) can lead to a decrease in overall spending and a reduction in investment. This is because, in order for investment to occur, there needs to be a source of savings (i.e. money available to invest). Therefore, investment is highly related to income as it determines the amount of savings available for investment.

To Understand the Paradox of Thrift, It Is Necessary to Assume