AP MacroeconomicsAggregate Demand & Supply
Paradox of Thrift
The paradox of thrift is the idea that if everyone tries to save more at once, falling spending can lower total income so that aggregate saving doesn't rise and may fall.
A Keynesian result: saving is prudent for one household, but if all households cut spending simultaneously, aggregate demand drops, the multiplier shrinks output and income, and lower income means less saving overall. It is a leading example of the fallacy of composition and supports the case for fiscal stimulus during a downturn. It assumes the economy is below full employment.