CA Foundation · Business Economics · Determination of National Income
Which statement about the paradox of thrift is correct in the Keynesian framework?
The paradox of thrift says that if everyone tries to save more, consumption and aggregate demand fall, income declines, and total saving in the economy does not rise and may even fall. Individually sensible saving becomes self-defeating when investment does not increase.
- AIf all households try to save more, aggregate demand may fall so that total saving in the economy stays the same or fallsCorrect
- BHigher saving always raises investment and income immediately
- CAn increase in thrift raises the multiplier
- DSaving and investment are unrelated to income
Explanation
When households raise the desire to save, consumption falls and the multiplier shrinks, reducing income. With lower income, actual saving need not rise and, if investment is fixed, equals investment anyway. Option claiming higher saving raises income ignores the demand effect.
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