The following text discusses economics.
The paradox of thrift describes how actions that benefit individuals can harm the economy collectively. When many people simultaneously save more money during economic uncertainty, their reduced spending decreases demand for goods and services. Businesses then cut production and jobs, worsening the downturn they feared. This creates a feedback loop where individual prudence produces collective harm. Understanding this paradox helps explain why governments often increase spending during recessions despite declining tax revenues.
What does the paradox of thrift illustrate?
Saving money is always economically beneficial
Individually rational behavior can create negative collective outcomes
Government spending should never increase
Businesses benefit when consumers save more
Correct Answer: B
Choice B is the correct answer. The text states "actions that benefit individuals can harm the economy collectively" and "individual prudence produces collective harm."
- Evidence: Saving (individually prudent) worsens downturns (collectively harmful).
- Reasoning: What helps one person hurts everyone when everyone does it.
- Conclusion: Individual benefit can mean collective harm.
Choice A is incorrect because the paradox shows saving can harm collectively. Choice C is incorrect because government spending is explained as a reasonable response. Choice D is incorrect because reduced spending hurts businesses.