Question

Explain the 'paradox of thrift'.

Answer 1

The paradox of thrift refers to a situation in which people tend to save more money, thereby leading to a fall in aggregate savings of the economy as a whole. In other words, when everyone increases their saving-income proportion, MPS, then aggregate demand falls as consumption reduces. This leads to a decrease in the level of employment and income and reduces total savings in the economy. The concept was suggested by Keynes to depict how increased savings at an individual level will gradually lead to a slowdown in the economy.