In a simple Keynesian model, the paradox of thrift occurs when households try to save more and this leads to
Correct answer: A. a fall in aggregate income that may reduce total saving
- A. a fall in aggregate income that may reduce total saving
- B. a rise in consumption that increases total income
- C. a rise in imports that improves domestic employment
- D. a fall in investment caused by higher exports
Explanation
If all households attempt to save more, consumption falls and aggregate demand decreases. Lower income can offset the intended increase in saving, so total saving may not rise. This is the central idea of the paradox of thrift.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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