Which of the following most clearly states the "paradox of thrift"?
A) If households simultaneously attempt to increase their savings, the result may be a reduction in demand, output, and total savings.
B) A strong, healthy economy can be achieved if most households are heavily in debt.
C) A high savings rate will provide the funds for investment, which is a driving force of long-term economic growth.
D) A reduction in savings and an increase in consumption will expand output and employment.

Question

Quizplus · Accepted Answer

The paradox of thrift is the idea that if everyone in an economy tries to save more, total savings may actually decrease because the reduction in demand from the lack of spending will lead to lower economic output and income, making it more difficult for people to save. Option A most clearly states this paradox. Option B is incorrect because being heavily in debt is not necessarily a sign of a strong economy. Option C is partially true but does not address the paradoxical nature of increased savings potentially leading to lower overall savings, and option D is also incorrect because reducing savings may lead to short-term expansion, but could lead to economic instability in the long term.

Which of the Following Most Clearly States the "Paradox of Thrift