Final answer:
The 'paradox of thrift' suggests that increased saving by everyone can lead to lower overall income by reducing aggregate demand (option A). This concept is connected to the wealth effect, where inflation reduces the buying power of savings, ultimately decreasing consumption.
Step-by-step explanation:
The 'paradox of thrift' refers to the scenario where if everyone tries to save more money during times of recession, this can lead to a decrease in aggregate demand, which in turn may cause a fall in total aggregate income. This is because when people save more, they are spending less on goods and services, which can lead to decreased sales for businesses, potentially lower production, job cuts, and thus, lower overall income—effectively making the economy worse off.
The concept ties into the broader idea of the wealth effect, which indicates that as the price level rises, the real value of money held in savings is eroded by inflation, leading to a fall in consumption as people's perceived wealth decreases.