Practice question · Multiple choice
Keynes argued a government should spend MORE during a demand collapse, when a household in trouble would cut back. Why does the analogy to a household fail?
Hints
- Ask what happens to your income when your customers all economise at once.
- A household’s cutback does not reduce its own wages.
Show the answer
D. Because one agent's spending is another's income
Why
The paradox of thrift: individually sensible, collectively self-defeating. The household analogy fails because a household is small enough for its spending not to feed back into its own income.
Practise The Great Depression
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