Which of these 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 decrease 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 decrease 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 that when individuals increase their savings, it leads to a decrease in consumption and overall economic activity, which ultimately results in lower incomes and savings for everyone. Choice B illustrates this paradox because consumer uncertainty leads to an increase in savings, which ultimately leads to a decrease in equilibrium income and production, causing savings to decrease as a result of lower income.

Which of These Illustrates the Paradox of Thrift