Macroeconomics. The financial elements Essay Example | Topics and Well Written Essays - 1500 words

Macroeconomics. The financial elements - Essay ExampleIf everybody in the population starts thriftiness the money, then ideally that should yield in an overall higher levels of savings. But John Maynard Keynes, the famous economist, studied this very aspect of thrift and pointed forth an interesting paradox. Keynes inferred that if everyone starts saving during times of recession then that would result in guideing of the aggregate demand, which in turn will result in lowering the value of total savings in the population and leads to fall in economic growth. He meant to say that thrift is virtuous only up to a limit. The paradox is that an increase in saving, which is a recommended microeconomic dodging when individuals encounter problems, is not the best macroeconomic course of action for the aggregate economy1.Therefore, when people try to increase their savings, it may lead to decrease in the levels of main(a) consumption which in turn will decrease the equilibrium income, th us decreasing the induced savings. This way the two components of the savings tend to cancel out each other, implying that even though people tried to increase their savings, the result happened to be a drop in equilibrium income and a no change in savings. That meat trying to save more doesnt necessarily result in more saving. It results, instead, in less income out of which to save. Some of the steps involved in this event and the effects that a chain reaction sets out after such a paradox areEverybody starts saving his money without spending any of their income. The markets die hard idle, as there are no customers and nothing is being sold.Since nothing is being sold, the shop owner starts feeling the pinch and fires his sales-boys and sales-girls. Gradually everyone loses their job.Similarly the takings of goods also comes to a halt, and there too employees start loosing their jobs.There is no income as suchAnd since theres no income there is no saving as well.That efficac iously results in zero savings. This is what John Maynard Keynes studied and objected to. This can further be demonstrated with the help of the Injections-Leakages moulding diagrams as shown in the following figuresFig The Injections-Leakages ModelThe two figures shown here depict the paradox of thrift in a convincing manner. For example, if to start with the saving line indicated by S has a positive peddle showing gradual increase in savings from a negative saving figure (i.e. expenditure) to a positive saving figure, then the equilibrium of employment is achieved by a production of $12 one thousand million i.e. at the intersection of S and I. Now, anticipating an impending recession, the community (or group of consumers) start increasing their levels of saving i.e. they are now little more on the thrifty side, by curtailing their expenditure plans. Therefore, the community is able to save an amount of $1 trillion more (see fig-2). The saving line is shifted upward and so the p oint of equilibrium is also shifted. The new saving line intersects original investment line at $8 trillion of aggregate production. This new equilibrium is therefore $4 trillion less than the original equilibrium. As compared to an increase in net saving by $1 trillion, there is a