Suppose at the initial equilibrium of $Y^*$, there is an exogenous or autonomous shift in peoples' expenditure pattern – they suddenly become more thrifty.

What will be the sequential effect of the above on the economy?

(A) The sudden decline in MPC will imply a decrease in aggregate consumption spending and hence in aggregate demand.

(B) There emerges an excess supply in the economy, but that would mean a reduction in factor payments in the next round and hence a reduction in income.

(C) There is no change in the total value of savings.

(D) MPS of the economy increases, and hence MPC falls.

Choose the correct answer from the options given below:

Option 3: (D), (A), (B), (C) -> When people suddenly become more thrifty, the sequential effects are: (D) First, MPS increases and MPC falls as people's behavioral preference shifts toward saving more and consuming less. (A) Second, this decline in MPC leads to a decrease in aggregate consumption spending and aggregate demand. (B) Third, the fall in aggregate demand creates excess supply in the economy, causing firms to reduce production and factor payments, thereby reducing income. (C) Finally, despite the increased propensity to save, there is no change in total savings - this is the 'Paradox of Thrift' where the attempt to save more collectively results in lower income, leaving total savings unchanged at the new equilibrium. This demonstrates how increased thriftiness can be self-defeating at the macroeconomic level. -> correct