Question

The Paradox of Thrift refers to:

• A. Higher savings lead to lower investment.
• B. Higher savings increase national income in the long run.
• C. Higher savings during recessions can reduce national income.
• D. None of the above.

Answer 1

The Correct Option is C

The Paradox of Thrift posits that while personal saving is advantageous, a widespread increase in savings, particularly during economic downturns, can hinder overall economic expansion. This seemingly contradictory outcome arises because:

• Increased individual savings translate to diminished consumer spending.
• A decline in consumer spending results in a reduction of aggregate demand.
• Subdued aggregate demand triggers lower output, income, and employment.
• Consequently, the economy experiences a contraction, leading to a decrease in national income in the short run.

Hence, although increased savings appear beneficial at the individual level, during periods of economic weakness, they can diminish overall economic activity, illustrating the paradox. The accurate assertion is: During recessions, elevated savings can lead to a reduction in national income.