CUET Preparation Today
Arrange the following as per the theory of the 'Paradox of Thrift': (A) Marginal Propensity to consume decreases. Choose the correct answer from the options given below: |
(C), (A), (D), (B) (A), (C), (B), (D) (B), (A), (C), (D) (C), (B), (A), (D) |
(C), (A), (D), (B) |
The correct answer is Option (1) → (C), (A), (D), (B) The Paradox of Thrift suggests that when everyone tries to save more, overall savings in the economy may not increase because of a fall in income.
(C) People become more thrifty. This is the initial action that starts the paradox. Individuals decide to save a larger portion of their income. (A) Marginal Propensity to consume decreases. As people become more thrifty, they consume a smaller fraction of each additional unit of income, which means their Marginal Propensity to Consume (MPC) falls. (D) Equilibrium level of income decreases. The decrease in consumption leads to a fall in aggregate demand. This, in turn, reduces the equilibrium level of national income and output through the multiplier effect. (B) Amount of savings decreases. Because the total income of the economy has fallen so significantly, the total amount of savings in the economy also decreases, even though each individual's desire to save has increased. |
