If all the people of the economy increase the proportion of income they save (i.e. if the mps of the economy increases) the total value of savings in the economy will not increase – it will either decline or remain unchanged. What does it refer to in economics?
If all the people of the economy increase the proportion of income they save (i.e. if the mps of the economy increases) the total value of savings in the economy will not increase – it will either decline or remain unchanged. What does it refer to in economics?
Solution
✅ Correct Option: 3
This is the paradox of thrift. When everyone tries to save a larger fraction of income, aggregate demand falls, reducing equilibrium income. As savings depend on income, total savings fail to rise and may fall or stay unchanged.
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