Read the paragraph carefully and give the answers of the following questions :.
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 learned. Let us continue with the example. Suppose at the initial equilibrium of Y, there is an exogenous or autonomous shift in people's 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. Hence the MPS of the economy increases, or, alternatively, the MPC decreases. The multiplier is an important concept to find out the effect of the autonomous expenditure on aggregate output whose value is calculated by 1/1-MPC, where, MPC is equal to 1-MPS.
Which is NOT the component of Aggregate Demand ?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Savings.
To find what aggregate demand is made of, ask who spends on the goods and services produced in the economy. Households consume, firms invest, the government buys goods and services, and foreigners buy our exports while we buy imports. The total of this planned spending is aggregate demand:
In an economy without a government it is the sum of planned consumption and planned investment, AD = C + I.
With the government and foreign trade it also includes government spending and net exports (exports minus imports).
Savings is the part of income that is not consumed: income held back from spending, not spending on any good, so it is not a component of aggregate demand. In fact a rise in saving lowers aggregate demand, which is the root of the Paradox of Thrift in the passage.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 15-05 S1 | – | 19-07 S1* | 11-06 S3* | – |
* A similar question.
NCERT (2025-26): “4.2 Determination of Income in Two-Sector Model … In an economy without a government, the ex ante aggregate demand for final goods is the sum total of the ex ante consumption expenditure and ex ante investment expenditure on such goods, viz. AD = C + I.… …Let us also look at another dimension of this, savings. Savings is that part of income that is not consumed.…” |