2023 · Q68
If all the people of the economy increase the proportion of income they save, the total value of savings in the economy will either decrease or remain unchanged. This phenomenon is known as:
indian-polity-economyeconomy-fundamentals
- ACrowding out
- BCrowding in
- CParadox of thrift
- DParadox of prosperity
Explanation
The paradox of thrift, formulated by Keynes, holds that when all households try to save a larger proportion of their income, aggregate demand and incomes fall, so that total savings in the economy decrease or remain unchanged instead of rising. Crowding out and crowding in describe the effects of government borrowing on private investment, not this phenomenon. Hence the paradox of thrift.