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Using the simple Keynesian model and the savings and investment diagram show the full meaning of the paradox of thrift? What would happen to equilibrium income if there is a sustained rise in private investment spending? What causes the rise in income or output to come to a stop?

When people become more inclined to save, their level of consumption goes down in all the income levels. This will lead to a reduction in the equilibrium level of income, as shown below.

reduction in the equilibrium level of income

The paradox thrift implies that a great willingness to save may actually lead to fewer savings. From the diagram above, which is a combination of the Keynesian model and the investment savings model, the income level is in equilibrium at point Oe0. At this point, the investment level is at I0 while the savings level is at Os0. Owing to the fears of economic recession, people are inclined to save more than they consume. This shifts the saving function to S1, reducing the level of equilibrium income to Oe1. The level of investment also declines to It+1 following the decline in consumption. This further leads to a decline in the level of income to the equilibrium level at Oet+1, and the equilibrium savings level falls as well to Ost+1. The savings end up being less than what was expected, and this explains the theory of the paradox thrift.

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Academic.Tips. (2021) 'Using the simple Keynesian model and the savings and investment diagram show the full meaning of the paradox of thrift? What would happen to equilibrium income if there is a sustained rise in private investment spending? What causes the rise in income or output to come to a stop'. 22 July.

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Academic.Tips. (2021, July 22). Using the simple Keynesian model and the savings and investment diagram show the full meaning of the paradox of thrift? What would happen to equilibrium income if there is a sustained rise in private investment spending? What causes the rise in income or output to come to a stop? https://academic.tips/question/using-the-simple-keynesian-model-and-the-savings-and-investment-diagram-show-the-full-meaning-of-the-paradox-of-thrift-what-would-happen-to-equilibrium-income-if-there-is-a-sustained-rise-in-private/

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Academic.Tips. 2021. "Using the simple Keynesian model and the savings and investment diagram show the full meaning of the paradox of thrift? What would happen to equilibrium income if there is a sustained rise in private investment spending? What causes the rise in income or output to come to a stop?" July 22, 2021. https://academic.tips/question/using-the-simple-keynesian-model-and-the-savings-and-investment-diagram-show-the-full-meaning-of-the-paradox-of-thrift-what-would-happen-to-equilibrium-income-if-there-is-a-sustained-rise-in-private/.

1. Academic.Tips. "Using the simple Keynesian model and the savings and investment diagram show the full meaning of the paradox of thrift? What would happen to equilibrium income if there is a sustained rise in private investment spending? What causes the rise in income or output to come to a stop?" July 22, 2021. https://academic.tips/question/using-the-simple-keynesian-model-and-the-savings-and-investment-diagram-show-the-full-meaning-of-the-paradox-of-thrift-what-would-happen-to-equilibrium-income-if-there-is-a-sustained-rise-in-private/.


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Academic.Tips. "Using the simple Keynesian model and the savings and investment diagram show the full meaning of the paradox of thrift? What would happen to equilibrium income if there is a sustained rise in private investment spending? What causes the rise in income or output to come to a stop?" July 22, 2021. https://academic.tips/question/using-the-simple-keynesian-model-and-the-savings-and-investment-diagram-show-the-full-meaning-of-the-paradox-of-thrift-what-would-happen-to-equilibrium-income-if-there-is-a-sustained-rise-in-private/.

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"Using the simple Keynesian model and the savings and investment diagram show the full meaning of the paradox of thrift? What would happen to equilibrium income if there is a sustained rise in private investment spending? What causes the rise in income or output to come to a stop?" Academic.Tips, 22 July 2021, academic.tips/question/using-the-simple-keynesian-model-and-the-savings-and-investment-diagram-show-the-full-meaning-of-the-paradox-of-thrift-what-would-happen-to-equilibrium-income-if-there-is-a-sustained-rise-in-private/.

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