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      Question

      Which of the following scenarios best represents the

      ‘Paradox of Thrift’ as explained by Keynesian economics?
      A A rise in household savings leads to a fall in aggregate demand, reducing overall economic growth. Correct Answer Incorrect Answer
      B An increase in the money supply leads to a proportional increase in nominal GDP. Correct Answer Incorrect Answer
      C Higher government borrowing results in increased private sector investments due to crowding-in effects. Correct Answer Incorrect Answer
      D A reduction in central bank interest rates causes inflation to remain at zero due to consumer pessimism. Correct Answer Incorrect Answer
      E None of the above. Correct Answer Incorrect Answer

      Solution

      Explanation:  

      • The Paradox of Thrift suggests that while individual savings are beneficial, if everyone increases savings, aggregate demand falls , leading to reduced economic output and growth.  
      • Keynes argued that excessive saving during recessions worsens economic downturns.  

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