The figure given below represents the leakages and injections in an economy. Figure 10.3 In the figure:
S₁ and S₂: Saving functions
I: Investment
G: Government spending
EX: Net exports
In Figure 10.3, which of the following represents the paradox of thrift?

Question

The figure given below represents the leakages and injections in an economy. Figure 10.3

In the figure:
S₁ and S₂: Saving functions
I: Investment
G: Government spending
EX: Net exports
In Figure 10.3, which of the following represents the paradox of thrift?

Quizplus · Accepted Answer

The paradox of thrift refers to the situation where an increase in saving leads to a decrease in aggregate demand and therefore to a decrease in output and employment. In the figure, a shift of the saving curve from S₁ to S₂ represents an increase in saving which would lead to a decrease in equilibrium output (from $400 to $300) and potentially to a recession. Therefore, this represents the paradox of thrift. Choice A represents a decrease in saving which would lead to an increase in aggregate demand and therefore to an increase in output, so it does not represent the paradox of thrift. Choice C is the result of the paradox of thrift but does not represent the paradox itself. Choices D and E represent changes in equilibrium output but do not relate to the paradox of thrift.

The Figure Given Below Represents the Leakages and Injections in an Economy