Question

What happens in the Keynesian model if households decide to be thriftier that is spend less and save more? Do the following multistep exercise to find out.

Answer 1

The Paradox of Thrrift is a situation where household sectors save more money during the depression time such situation is known as the paradox of thrift. The concept of the thrrift developed by the economist J.M. Keynes.

According to Keynes saving is good for the individual, but for the economy, it is not good. The problem of the paradox of thrift can be understood with following the example.

For example, everybody receives income of $1000, and they save $500 of their income and remaining $500 spent on consumption. By spending $500 consumption has the multiplier effect on investment, employment output.

Another hand everybody receives income of $1000 and they save $750 and remaining $ 250 spent on consumption. Since expenditure on consumption goods is less producer will produce smaller output and laying off the labors and followed by low investment.

Thus the paradox of the thrift has a greater problem in during depression and it rises further problem during the depression.