Discuss what is meant by the paradox of saving.

What will be an ideal response?


The paradox of saving refers to the effects of an increased desire to save on output and on the final level of saving. The increased desire to save is equivalent to a reduction in consumption. This drop in demand will cause a drop in output. Furthermore, in this simple economy, the final level of saving will equal the initial level of saving. So, an increased desire to save has a negative effect on the economy and has no permanent effect on the level of saving (because S = I in the simple model).