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:

(D), (A), (B), (C)

The correct answer is Option (3) → (D), (A), (B), (C)

This question describes a scenario known as the Paradox of Thrift in the Keynesian model of income determination.

(D) MPS of the economy increases, and hence MPC falls. A thriftier preference means people plan to save a higher fraction of any extra income; therefore the marginal propensity to save (MPS) rises and, since MPS + MPC = 1, the marginal propensity to consume (MPC) falls.

(A) The sudden decline in MPC will imply a decrease in aggregate consumption spending and hence in aggregate demand. With a lower MPC, any given income now translates into less consumption, so aggregate demand shifts downward.

(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. At the initial output Y^*, the fall in demand creates unintended inventories/excess supply; firms respond by cutting production, lowering factor payments (wages, profits), so income contracts.

(C) There is no change in the total value of savings. As income falls, actual (ex post) saving adjusts to equal planned investment; despite the attempt to save more, total saving does not rise—this is the paradox of thrift in the simple Keynesian model.