a virtue for the individual, is disastrous for an economy.’
Assume a 2-sector Keynesian model.
Suppose there is an exogenous
increase in planned saving. (For
example, there is an increase in the fear of losing jobs.) This means
that the autonomous saving will increase. Graphically the saving function
will shift vertically upward. (Click play on
Equilibrium income = Y1
S = I = A
At Y1, S = B; I = A; S > I
S > I implies Y > AD：Excess supply of goods exists
Click play on the diagram:
The new equilibrium income is Y2. (Income decreases)
As income decreases, saving decreases from B to A and I = S again!
As a result, the income will decrease
but the realised saving will remain unchanged at point A.
Paradox of thrift
The result is paradoxical because an increase
in the desire to save leads eventually to
a decrease in income. (市民增加儲蓄意欲反令其收入下降！)
no increase in realised saving. (市民增加儲蓄意欲卻不能使實際儲蓄到的金錢增加！)
Resolve the paradox
The above paradoxical results may not happen if
an increase in planned saving will lead to an exogeneous increase
in planned investment. Graphically both
the investment and the saving funtions will shift vertically upward.
(Click play on diagram)
Y remains at Y1
Saving increases from point A to
As a result, the income may not decrease
and the realised saving will increase.