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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