Consider the following statements about the paradox of thrift:
(A) A rise in people’s thrift may come from news of an imminent war or some other impending disaster.
(B) In NCERT’s numerical example, total saving falls from 10 to 5 when the mpc falls from 0.8 to 0.5.
(C) If all the people of an economy raise the proportion of income they save, total saving in the economy will not increase.
(D) When people become more thrifty, total saving in the economy either declines or remains unchanged.
(E) When people become more thrifty, total saving rises, because investment rises along with saving.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (C) and (D) only
(A) A rise in people’s thrift may come from news of an imminent war or some other impending disaster. — Correct. News of an imminent war or disaster can make people more careful with spending.
(B) In NCERT’s numerical example, total saving falls from 10 to 5 when the mpc falls from 0.8 to 0.5. — Incorrect. In the example, saving is 10 both before and after: it stays unchanged.
(C) If all the people of an economy raise the proportion of income they save, total saving in the economy will not increase. — Correct. Total saving does not rise.
(D) When people become more thrifty, total saving in the economy either declines or remains unchanged. — Correct. It either declines or remains unchanged.
(E) When people become more thrifty, total saving rises, because investment rises along with saving. — Incorrect. Total saving does not rise, because income falls when people spend less.
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 … Let us continue with the example. Suppose at the initial equilibrium of Y = 250, there is an exogenous or autonomous shift in peoples’ expenditure pattern – they suddenly become more thrifty. This may happen due to a new information regarding an imminent war or some other impending disaster, which makes people more circumspect and conservative about their expenditures. …” “Paradox of Thrift … People are now saving S*2 = Y*2 – C*2 = Y*2 – (C̄ + c2.Y*2) = 100 – (40 + 0.5 × 100) = 10 in aggregate, whereas under the previous equilibrium they were saving S*1 = Y*1 – C*1 = Y*1 – (C̄ + c1.Y*1) = 250 – (40 + 0.8 × 250) = 10 at the previous mpc, c 1 = 0.8. Total value of savings in the economy has, therefore, remained unchanged. …” |