The Paradox of Thrift: Consider the simple model of the good markets: Y = C +I+G C = Co + C1(Y – T) I = Io – Ihr G = G T = T Saving in the simple model of the goods market is defined as S = Y -C G.

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The Paradox of Thrift: Consider the simple model of the good markets:
Y = C +I+G
C = Co + C1(Y – T)
I = Io – hr
G = G
T T
Saving in the simple model of the goods market is defined as S = Y C – G.
(a) Using the goods market equilibrium and the definition of saving, find the pre-
dicted change in aggregate savings if cOHISumers decided to save more (Co ).
Explain why the effect of an aggregate increase in savings is called a paradox
using your answer.
Transcribed Image Text:The Paradox of Thrift: Consider the simple model of the good markets: Y = C +I+G C = Co + C1(Y – T) I = Io – hr G = G T T Saving in the simple model of the goods market is defined as S = Y C – G. (a) Using the goods market equilibrium and the definition of saving, find the pre- dicted change in aggregate savings if cOHISumers decided to save more (Co ). Explain why the effect of an aggregate increase in savings is called a paradox using your answer.
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