In 2009, Nobel-prize winning economist Paul Krugman wrote,
“The paradox of thrift is one of those Keynesian insights that
largely dropped out of economic discourse. Now it’s back as a
concept.”
Either: Use the following data to explain the paradox of
thrift:
Y = C + Ig + G + Xn
Y = 50 + .9Y + 50 + 50 + 50
What is the savings function where S = -a + (1-b)Y?
Find equilibrium GDP (solve for Y)?
Use the answer to determine the level of S
Now suppose Savings increases by $10 so Consumption decreases
by $10
Find the new equilibrium GDP and calculate the savings
function and level of Savings.
Use your answer to explain the paradox of thrift.
Or: Describe in words and in a graph why the paradox of thrift
is truly a paradox.