Assignment:
The paradox of thrift:
The assessment presents a unique outlook on how people view saving. I agree to the theory as asserted by Keynes when the marginal propensity to save escalates, the overall revenue of the businesses falls increasing the downturn and stunts economic growth. The theory brings to light when one is not spending their money another one is losing the salary required to sustain them.
Therefore, reduction on consumption is a repel effect of increased saving hence stifles the demand. A good instance that explains the paradox is where one decides to save for the new iPhone 8 by cutting the expenditure on leisure. The shifts to retract spending on leisure deny the wait staff in the frequented resorts and clubs some tips and work hours.
Sequentially, the workers will replicate the trend through cutting on their expenditure since they earn less. The above example is done to represent an individual. Picture a society doing the same and what results is the Keynesian multiplier effect making it decreased spending and lower wages for everyone. The output decrease and limits economic soaring/ recovery until the people with saving goals buy the intended good and return to their usual spending propensities.
However, the theory has seen criticism like Friedrich Hayek who asserts that deflation in downturn stimulates demand and saving, as a result, can trigger the multiplier effect. In his argument, one note that the savings level ratio required to be detrimental during a collapse may be unrealistic hence diminishing the significance of the paradox.
Reference
Arnold, R. A. (2008). Microeconomics. Mason, OH: Thomson/South-Western.
On paper, the Keynesian theory does sound plausible. If more are saving funds and not putting back into the economy businesses would only survive by making cutbacks on jobs and production. Keynes was also the one who designed the "Stimulus Plan" during the Great Depression, but how did that work out? Four years after Keynes' economic plan went into effect in the mid-1930's, unemployment in the U.S. was at 16%, four times what unemployment is today. So what brought the U.S. out of the Depression? It wasn't Keynesian economics, it was World War II. See my follow-up comments in your grade book.