Economics • Economic BasicsMedium
What is meant by the 'Paradox of Thrift' in macroeconomics?
A. An increase in autonomous investment leads to a proportional decrease in national savings.
B. If everyone increases their saving during a recession, total aggregate savings may actually fall due to reduced overall spending.✓ Correct Answer
C. Higher interest rates always discourage both savings and investment simultaneously.
D. Government borrowing crowds out private savings completely in the long run.
💡 Solution & Explanation
The paradox of thrift, popularized by John Maynard Keynes, demonstrates that individual attempts to increase savings during a recession can reduce aggregate demand, thereby lowering national income and total savings. Alternative options incorrectly associate savings behavior with autonomous investment or long-term crowding out rather than the Keynesian paradox of aggregate demand. This concept is frequently tested alongside the paradox of idle capacity in macroeconomic theory.
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