Question

According to this question: Explain the tendency for underconsumption crisis. Include in your answer, the paradox of thrift, the absolute income hypothesis, the rising rate of exploitation and how these effect the tendency for the rate of growth of output to exceed the rate of growth of consumption.

The Political Economy Question is:

What happened to consumer spending, household debt and housing process during this period? How did this “solve” the demand problem?

Answer 1

Underconsumption crisis refers to the crisis of fall in aggregate demand. Fall in aggregate demand causes fall in economic activities and resultant fall in employment opportunities.

Paradox of thrift also says that when saving is raised by slashing down consumption, the aggregate demand fall and which leads to fall in income and employments in economies. Similarly, rising rate of exploitation means labor or production resources are not paid according to their contribution which means now their income would not be sufficient to consume all produced goods and services. Thus growth rate will outpace the growth rate of consumption. it will also result into mass unemployment owing to fall in demand.

Impacts:

Consumer spending falls during this period. And further, we find that consumer debt also piles up.

Government must use expansionary fiscal policy by increasing expenditure and reducing taxes to drive up aggregate demand in economy.