If all the people of the economy increase the proportion of income the

If all the people of the economy increase the proportion of income they save, the total value of savings in the economy will either decrease or remain unchanged. This phenomenon is known as :

Crowding out

Crowding in

Paradox of thrift

Paradox of prosperity

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This question was previously asked in

UPSC CAPF – 2023

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The phenomenon described is known as the Paradox of Thrift (or Paradox of Saving). It is a concept in Keynesian economics stating that if everyone in an economy attempts to increase their saving rate simultaneously, the aggregate demand will fall. This leads to a decrease in production and income. Since aggregate saving depends on income (Saving = propensity to save * income), the fall in income can lead to a decrease in total saving, or at best, no increase, despite individuals trying to save more. The collective outcome is opposite to the individual intention.

The Paradox of Thrift highlights how increased individual saving efforts can collectively lead to lower overall income and potentially reduced total saving due to decreased aggregate demand.

Crowding out occurs when increased government borrowing raises interest rates, reducing private investment. Crowding in occurs when government spending stimulates economic activity and encourages private investment. The paradox of thrift applies primarily to economies operating below full employment, where a fall in aggregate demand leads to reduced output.

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