Which of the Following Illustrates the Paradox of Thrift

question 50

Multiple Choice

Which of the following illustrates the paradox of thrift?

• A) Consumer uncertainty causes people to save less; consumption rises; equilibrium income and production falls; savings decrease because income is lower.
• B) Consumer uncertainty causes people to save more; consumption falls; equilibrium income and production falls; savings decreases because income is lower.
• C) The government encourages saving by raising interest rates; higher interest rates reduce investment spending, which lowers equilibrium income and causes production to fall; savings decreases because income is lower.
• D) As businesses save more, interest rates fall, thus reducing household savings.

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Definitions:

Required Reserve Ratio

The fraction of deposits that banks are mandated by the central bank to keep on hand as reserves, rather than loaning out.

Total Reserves

The sum of a bank's deposits held at the central bank and the cash held in vaults.

Checkable Deposits

Refers to deposits in bank accounts from which individuals can write checks or use debit cards to make purchases directly.

Required Reserves

The minimum amount of funds that a bank must hold in reserve against deposits, as mandated by central banking regulations.