If all the people in the economy increase the proportion of income they save (i.e. is the MPS of the economy increases) then the total value of savings in the economy will not increase, it will either decline or remain unchanged. This result is known as Paradox of Thrift, which states that as people become more thrifty, they end up saving less or same as before. When there is an information about some impending disaster or imminent war, people suddenly become thrifty and MPS of the economy increases, which leads to a decrease in MPC This sudden decrease in MPC will imply a decrease in aggregate consumption and hence in aggregate demand. This can be regarded as autonomous reduction in consumption expenditure. As aggregate demand decreases stocks are piling up in warehouses and producers decide to cut value of production.

What will be the effect on Aggregate Demand when MPC decreases ?

Aggregate Demand Decreases

The passage states that when MPC decreases, aggregate demand decreases. This is because a decrease in MPC leads to a decrease in consumption, which is a component of aggregate demand. The other component of aggregate demand is investment, which is assumed to remain constant in this scenario. Therefore, the overall decrease in consumption leads to a decrease in aggregate demand.

So the answer is Aggregate Demand Decreases.