Related to the Economics in Practice on p.472: According to the "paradox of thrift," as individuals increase their saving,
A)income in the economy increases because there is more money available for firms to invest.
B)income in the economy increases because interest rates will fall and the economy will expand.
C)income in the economy will remain constant because the change in consumption equals the change in saving.
D)income in the economy will fall because the decreased consumption that results from increased saving causes the economy to contract.

Question

Quizplus · Accepted Answer

The paradox of thrift suggests that as individuals increase their saving, consumption decreases and this causes a drop in aggregate demand, leading to a fall in income and output. This is because consumption accounts for a significant part of aggregate demand in the economy, and a decrease in consumption results in a decrease in demand for goods and services, causing a contraction in economic activity. Therefore, the correct option is D. Options A, B, and C are incorrect as they do not explain the paradox of thrift.

Related to the Economics in Practice on P