Question

Which of the following policies should a country implement in an economic downturn to avoid a Paradox of Thrift?

a) Implement policies to encourage saving.
b) Implement policies to encourage greater consumption.
c) Raise taxes to ensure the government stays funded.
d) Reduce overall government spending.

Answer 1

B) Implement policies to encourage greater consumption.

Step-by-step explanation:

The Paradox of thrift says that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will, in turn, lower total saving due to that total saving may fall because of individuals' attempts to increase their saving, Therefore, to avoid the paradox of thrift policies to encourage consumption must be implemented.