Economics • Economic BasicsMedium
In macroeconomic equilibrium, what does the 'Paradox of Thrift' imply?
A. Increased savings by individuals collectively reduce total aggregate demand and overall economic output✓ Correct Answer
B. Higher personal savings rates consistently accelerate long-term national wealth accumulation
C. Thriftiness eliminates the need for central bank interest rate adjustments
D. Public savings have no correlation with private sector investment spending
💡 Solution & Explanation
The paradox of thrift demonstrates that when individuals collectively increase their savings during an economic downturn, aggregate demand falls, which reduces overall national income and output. Although individual saving is prudent at a micro level, widespread withdrawal of spending harms macroeconomic equilibrium. This concept highlights the fallacy of composition within Keynesian economic theory.
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