C = 40 + 0.75Y and investment is fixed at ₹60 crore. Households become thriftier and autonomous consumption falls to ₹20 crore. What happens to equilibrium income and total saving?

Income stays at ₹400 crore; saving rises to ₹80 croreCorrect answerYour answerIncome falls to ₹380 crore; saving rises to ₹80 croreCorrect answerYour answerIncome rises to ₹480 crore; saving stays at ₹60 croreCorrect answerYour answerIncome falls from ₹400 crore to ₹320 crore; saving stays at ₹60 croreCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer D

Correct answer: D

New Y = (20 + 60) ÷ 0.25 = 320, down from 400.
At equilibrium S = I = 60, so total saving is unchanged although every household tried to save more.

Concept: Paradox of thrift in numbers
Typical timeTypical: 100 s
Your timeYours: —

The rule this testsThe paradox of thrift

Practise this chapter →

Ten questions from Income Determination & the Multiplier, at your own pace.

C = 40 + 0.75Y and investment is fixed at ₹60 crore. Households become thriftier and autonomous consumption falls to ₹20 crore. What happens to equilibrium income and total saving?

Explanation