Money and banking

Indian Economy (CDS)

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Indian Economy - Understanding the basics of Indian economic system

Which one of the following best describes the ‘Paradox of Thrift’?

It states that individuals try to save more during an economic recession, which leads to a fall in aggregate demand.

A decrease in real wages will not increase the profits of firms and will instead lead to a fall in employment.

An increase in public spending will not stimulate the economy but will increase the debt burden.

The demand for a good increases when its price increases.

Option A is correct: It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth.
According to the paradox, saving is a net drag on the economy during a recession, and prices do not adjust to changes in demand.
The paradox implies that personal savings can be detrimental to the overall economy.
Option B is incorrect: The Paradox of Costs states that a decrease in real wages will not increase the profits of firms and will instead lead to a fall in employment.
Option C is incorrect: The Paradox of public deficits states that increasing government spending will not boost the economy but rather add to the nation's debt load.
Option D is incorrect: The Giffen Paradox is a phenomenon in which the demand for a good increases when its price increases.
This is an exception to the Law of demand.
It occurs in the case of inferior goods, which are more in demand at lower incomes.
Consumers purchase more of the inferior goods and less of other goods as a result of price increase because the income effect is greater than the substitution effect.