In the class, we discussed the Paradox of Thrift argued by John Maynard Keynes.
ID: 1181436 • Letter: I
Question
In the class, we discussed the Paradox of Thrift argued by John Maynard Keynes. According to the argument, even if many household decide at the same time to increase their saving, the total saving will not increase in the long run, while it leads the economy to a recession. For example,
case1: Income = N, MPC = ?, MPS = ?. case2: Income = N, MPC = ??, MPS = ?? where?? >?and0<?,?,??,?? <1.
Even though household decide to save more in case 2, the total saving in the long run will be same in the both cases.
(Question) Prove that the total saving in the long run in case 1 equals to that in case 2.
-At this time, I recommend you to solve this question theoretically using N, ?, ?, ??, ?? rather than using specific number such as 0.8 or 0.9.
-Hint: Use the concept of multiplier effect covered in the class.
Explanation / Answer
In the short run, if households save more of their income and spend less of it, aggregate expenditure and
real GDP will decline. John Maynard Keynes argued that if many households decide at the same time to
increase their saving and reduce their spending, they make themselves worse off by causing aggregate
expenditure to fall, thereby pushing the economy into a recession. The lower incomes in the recession
might mean the saving does not increase, despite the attempts by many individuals to increase their
saving. if many households decide at the same time to increase their saving and reduce their spending, they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession.
The lower incomes in the recession might mean that total saving does not increase, despite the attempts by many individuals to increase their own saving.