In a two-sector economy (0 < c < 1), which of the following pairs of a change and its effect on total saving at the new equilibrium is correctly matched?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → A rise in autonomous consumption – total saving is unchanged
At equilibrium, Y = C + I, so saving (Y − C) equals planned investment. Total saving therefore changes only when investment changes.
Option (1) A fall in autonomous consumption – total saving falls — Incorrect. Income falls, but saving still equals the unchanged investment, so saving is unchanged.
Option (2) A rise in autonomous investment of Rs 10 crore – total saving is unchanged — Incorrect. Saving equals investment, so it rises by Rs 10 crore.
Option (3) A rise in the mps – total saving rises — Incorrect. This is the paradox of thrift: output falls, and total saving stays the same as investment.
Option (4) A rise in autonomous consumption – total saving is unchanged — Correct. Income rises, but investment is unchanged, so total saving is unchanged.
NCERT (2026-27): “Paradox of Thrift 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. This result is known as the Paradox of Thrift – which states that as people become more thrifty they end up saving less or same as before. This result, though sounds apparently impossible, is actually a simple application of the model we have learnt.” “Paradox of Thrift … The equilibrium output and aggregate demand have declined by 150. As explained above, this, in turn, implies that there is no change in the total value of savings.” |