UPSC Exam > UPSC Questions > Consider the following statements. 1. If all...
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Consider the following statements.
1. If all the people of the economy increase the proportion of income they save the total value of savings in the economy will not increase
2. People become thriftier they end up saving less or same as before
Which of these statements are not correct?
- a)1 Only
- b)2 Only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'D'. Can you explain this answer?
Most Upvoted Answer
Consider the following statements. 1. If all the people of the econom...
Explanation:
To determine the correctness of the given statements, let's analyze each one individually.
Statement 1: If all the people of the economy increase the proportion of income they save, the total value of savings in the economy will not increase.
This statement is incorrect. When people increase the proportion of income they save, it means they are saving a larger portion of their income instead of spending it. This leads to an increase in the total value of savings in the economy. If everyone in the economy saves a higher proportion of their income, the overall savings in the economy will increase.
Statement 2: People become thriftier they end up saving less or the same as before.
This statement is also incorrect. When people become thriftier, it means they are adopting a more frugal and economical approach to their spending habits. This generally results in an increase in savings because individuals are cutting back on unnecessary expenses and saving more money. Therefore, people becoming thriftier often leads to saving more or at least maintaining the same level of savings as before.
Therefore, both statements 1 and 2 are incorrect.
In conclusion, the correct answer is option 'D' - Neither 1 nor 2.
To determine the correctness of the given statements, let's analyze each one individually.
Statement 1: If all the people of the economy increase the proportion of income they save, the total value of savings in the economy will not increase.
This statement is incorrect. When people increase the proportion of income they save, it means they are saving a larger portion of their income instead of spending it. This leads to an increase in the total value of savings in the economy. If everyone in the economy saves a higher proportion of their income, the overall savings in the economy will increase.
Statement 2: People become thriftier they end up saving less or the same as before.
This statement is also incorrect. When people become thriftier, it means they are adopting a more frugal and economical approach to their spending habits. This generally results in an increase in savings because individuals are cutting back on unnecessary expenses and saving more money. Therefore, people becoming thriftier often leads to saving more or at least maintaining the same level of savings as before.
Therefore, both statements 1 and 2 are incorrect.
In conclusion, the correct answer is option 'D' - Neither 1 nor 2.
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Consider the following statements. 1. If all the people of the econom...
- All the people of the economy increase the proportion of income they save (i.e. if the mps of the economy increases) the total value of savings in the economy will not increase – it will either decline or remain unchanged.
- This result is known as the Paradox of Thrift – which states that as people become thriftier they end up saving less or the same as before. This result, though sounds apparently impossible, is actually a simple application of the model we have learnt. Let us continue with the example.
- Suppose at the initial equilibrium of Y = 250, there is an exogenous or autonomous shift in peoples’ expenditure pattern – they suddenly become more thrifty.
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