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Paradox of Thrift

The Keynesian paradox of thrift is an economic theory proposed by John Maynard Keynes, which states that an increase in saving can lead to a decrease in economic activity and a decrease in overall saving.

This occurs because an increase in saving reduces consumer spending, which can lead to a decline in production and a corresponding decline in income. This, in turn, can lead to a further decline in spending and a decrease in saving.

The Keynesian paradox of thrift is based on the idea that consumption is a key driver of economic activity, and that a decline in consumption can have negative impacts on the economy. It suggests that, in some circumstances, it may be more beneficial for individuals and households to consume rather than save, in order to stimulate demand and support economic growth.

The paradox of thrift is often discussed in the context of economic recessions, when there is a decline in demand and a corresponding decline in production. In these cases, policies that encourage consumption, such as government spending or lower interest rates, may be used to stimulate demand and help to mitigate the negative effects of the recession.

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