Question

5.  In 2009, Nobel-prize winning economist Paul Krugman wrote, “The paradox of thrift is one of those Keynesian insights that largely dropped out of economic discourse.  Now it’s back as a concept.”

Either: Use the following data to explain the paradox of thrift:  

Y = C                 + Ig       + G       + Xn

Y = 50 + .9Y       + 50      + 50      + 50

What is the savings function where S = -a + (1-b)Y?

Find equilibrium GDP (solve for Y)?

Use the answer to determine the level of S

Now suppose Savings increases by $10 so Consumption decreases by $10

Find the new equilibrium GDP and calculate the savings function and level of Savings.

Use your answer to explain the paradox of thrift.

Or: Describe in words and in a graph why the paradox of thrift is truly a paradox.  

Answer:

Answer 1