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.