Consider a simple Keynesian model where equilibrium output is determined by aggregate demand. Investment is autonomous and a constant proportion of income is saved. In this framework an increase in the savings propensity has the following effect:
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Keynesian cross and the multiplier has come up 167 times in 7 exams since 2006.
This question is on The paradox of thrift, part of Keynesian cross and the multiplier in Macroeconomics.
Why an attempt to save more can leave total saving unchanged or lower income.
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Question from the DSE 2008 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.