7
Answer: BSet 1: Command of Evidence (Advanced)
Explanation
PASSAGE
The 'Paradox of Thrift' suggests that while saving money is good for individuals, if everyone saves simultaneously, aggregate demand falls, leading to lower total income and potentially *less* total savings in the economy.
Which scenario best illustrates the negative outcome of the Paradox of Thrift?
A. A family saves for a vacation and stimulates the tourism industry.
B. Consumers stop spending during a recession, causing businesses to fire workers, which further reduces income.✓ Correct
C. High interest rates encourage foreign investment.
D. Banks have more money to lend to small businesses.
Detailed Explanation
The paradox is that collective saving hurts the economy. Option B shows this cycle: Saving (stop spending) -> Lower Demand -> Lower Income (firing) -> Worse outcome.
Key Evidence:
• "aggregate demand falls"
• "leading to lower total income"
Why others are wrong: A (This is positive spending.), C (Unrelated.), D (This assumes the savings are lent out effectively, ignoring the 'demand fall' aspect.).