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Generate QuizThe 'Paradox of Thrift' states that if everyone tries to increase their savings simultaneously during a recession, the ultimate result will be:
- A massive increase in total national wealth
- A decrease in aggregate demand and total savings
- High economic growth
- Zero inflation
Answer: A decrease in aggregate demand and total savings
Proposed by Keynes, the paradox illustrates that while saving is virtuous for an individual, a collective increase in savings reduces consumption. This drops aggregate demand, leading to lower production, job losses, and ultimately a lower total income, meaning the economy's actual total savings end up falling.