paradox of thrift


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Fig. 138 Paradox of thrift. The savings schedule rises from S to S 1, but this serves to reduce the equilibrium level of national income from Y to Y1, and the actual amount saved from Sy to Sy1.

paradox of thrift

the proposition that there is an inconsistency between the apparently virtuous nature of household SAVING and the potentially undesirable consequences of such saving. If most households decide to save a larger proportion of their incomes, then they will consume less, and this reduced expenditure will lower AGGREGATE DEMAND, so leading to lower levels of output and employment. Thus, an increase in savings will reduce the level of national income.

Thriftiness or saving is beneficial to the economy as it releases resources from the production of consumer goods to be used for producing investment goods. However, if households attempt to save more than businesses plan to invest at a given level of income (i.e. ‘withdrawals’ exceed ‘injections’ in the CIRCULAR FLOW OF NATIONAL INCOME), this will cause the EQUILIBRIUM LEVEL OF NATIONAL INCOME to decline, reducing also the actual amounts saved and invested.

References in periodicals archive ?
This is known as the paradox of thrift. Saving is bad for the economy in the short run, but great for growing the economy in the long run.
This is known as the (https://www.investopedia.com/terms/p/paradox-of-thrift.asp) paradox of thrift .
This is an example of what is known as the "paradox of thrift".
First we had the paradox of thrift. Now Scott Sumner brings us the Midas paradox.
The paradox of thrift, they call it: the more saved, the less spent, the less earned.
We know this because of the "paradox of thrift" popularized by John Maynard Keynes.
He famously demonized it with his concepts of the "liquidity trap" and the "paradox of thrift." As Keynes' biographer, Robert Skidelsky, recently said, "I think [Keynes] recognized intellectually, in order for capital accumulation to go on, you have to have a high savings rate.
John Maynard Keynes called it "the paradox of thrift," but it's hardly rocket science.
* Zhen Huo, University of Minnesota, and Jose-Victor Rios-Rull, University of Minnesota and NBER, "Engineering a Paradox of Thrift Recession"
KeynesaACAy "paradox of thrift" will therefore become the focus of discussion towards the end of 2013."
Keynes' "paradox of thrift" will therefore become the focus of discussion towards the end of 2013."
That financial conservatism is partly to blame for the sluggish recovery--the "paradox of thrift"--but it will be a good thing if more Americans actively manage and protect their wealth rather than letting it drift with the economic tides.