Increase In Savings = Decrease In Demand
If Savings ↑, then Consumption ↓
If Consumption ↓, then Demand ↓
If Demand ↓, then Production ↓
If Production ↓, then Employment and Income ↓
Individually: Saving is prudent. It provides financial security and prepares for the future.
Collectively: If every individual reduces consumption at the same time, businesses face falling revenues
The Role Of Multiplayer
When spending decreases, the loss in income is greater than the initial reduction.
Classical Economists:
They argue savings create investment, leading to growth.
Savings are loanable funds, so increased saving reduces interest rates and boosts investment.
To escape the paradox, Keynesians suggest counter-cyclical fiscal policies:
During recessions:
Cut taxes
Increase government spending
Provide unemployment benefits
