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:

Correct — C, Paradox of thrift. What is prudent for one household is self-defeating for all of them together. If every household cuts consumption to save more, aggregate demand falls; firms sell less, cut output and employment, and income falls. Since saving is done out of income, a higher saving rate applied to a smaller income need not produce any more saving. In the simple Keynesian model the result is exact: equilibrium requires planned saving to equal planned investment, so with investment unchanged, total saving ends up exactly where it started while national income is lower. Thrift has bought the economy a smaller income and not a rupee more of saving.

• (a)Crowding out — Crowding out is about government borrowing pushing up interest rates and displacing private investment. It involves the public sector squeezing the private one, not households frustrating themselves.
• (b)Crowding in — Crowding in is the opposite of crowding out — public investment in infrastructure raising the return on private investment and drawing it in. Again a fiscal-policy idea, nothing to do with the saving rate.
• (d)Paradox of prosperity — Not an established term in macroeconomics. It is placed here to look like a plausible sibling of the real answer.

The paradox of thrift is a fallacy of composition — an inference that is valid for one member of a group and invalid for the group as a whole. One family that saves more does end up with more savings, because its decision is too small to move national income. Every family doing it together moves national income, and that feedback is what destroys the result.

Follow the arithmetic. Consumption falls, so aggregate demand falls by the same amount to begin with; the multiplier then amplifies the fall in income to several times the initial cut. Saving is income minus consumption, so it is being pushed two ways — up by the higher saving rate, down by the shrinking income. In the textbook version with autonomous investment the two effects cancel exactly and total saving is unchanged; allow investment to fall as demand weakens and total saving actually declines. Both outcomes are what the question's phrase 'either decrease or remain unchanged' is pointing at. The idea is Keynes's, and it is one of the clearest illustrations of why macroeconomics is not household budgeting scaled up. It also carries a policy edge: in a slump, exhorting people to save more works against recovery, which is why fiscal support is the standard response.

• Saving is a leakage from the circular flow; consumption is what returns income to firms as demand.
• In equilibrium in the simple Keynesian model, planned saving equals planned investment, so with investment fixed a higher saving rate cannot raise total saving.
• The multiplier is 1/(1 − marginal propensity to consume), equivalently 1/marginal propensity to save; a higher saving propensity means a smaller multiplier.
• The paradox is a fallacy of composition — true of one household, false of all households acting together.
• It applies to a demand-constrained economy with idle capacity; in a supply-constrained economy more saving does finance more investment.

• Reading the paradox as a claim that saving is always harmful — it holds in a demand-constrained economy, not in one short of investible funds.
• Mixing up crowding out (fiscal) with the paradox of thrift (household saving behaviour).
• Assuming that because one household's saving rises, the national saving rate must rise too.

Asked as a definition-matching item — a one-sentence description of the phenomenon, with three other macro terms as decoys.

No directly related past PYQ was found.

• practice — not a real PYQ

  If the marginal propensity to consume in an economy is 0.8, the value of the investment multiplier is

  • (a)0.2
  • (b)1.25
  • (c)4
  • (d)5

  Answer(d) 5 — the multiplier is 1/(1 − 0.8) = 1/0.2 = 5.

• practice — not a real PYQ

  Government borrowing raising interest rates and thereby reducing private investment is described as

  • (a)crowding in
  • (b)crowding out
  • (c)the paradox of thrift
  • (d)the liquidity trap

  Answer(b) crowding out — public borrowing displaces private borrowing through the interest rate.