Paradox of saving
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The document discusses the paradox of thrift and its relationship to savings, investments, and recessions. It presents that during an economic recession, if people increase their savings by reducing spending, it can actually decrease total savings and investments in the economy. This is because lower spending can reduce production and employment, which then lowers people's incomes and their ability to save. So while individual savings may rise, the decreased economic activity can more than offset this at a macro level. The document also provides examples of savings instruments and investments, and examines savings and investments trends in India before and after economic reforms in 1991.
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There are three main managerial theories described in the document:
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The document defines the investment multiplier as the ratio of change in national income due to a change in investment. It explains that an initial increase in investment can lead to an even greater increase in national income through subsequent rounds of spending. The multiplier effect is dependent on the marginal propensity to consume. The document also outlines the assumptions, workings, and limitations of the multiplier model.
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1. Types of investments such as induced, autonomous, physical, financial and business assets.
2. Key determinants of investment including income, interest rates, Tobin's Q, and marginal efficiency of capital.
3. Multiplier effects including money, fiscal, and investment multipliers which measure the response of endogenous variables to exogenous changes.
4. The accelerator effect whereby growth in GDP encourages businesses to invest more in fixed assets like factories and machinery, further stimulating economic growth.
Classical theory of employment
The classical model of employment is based on the assumptions of full employment, laissez-faire, a self-adjusting economy, a barter system, and a closed economy. It is based on Say's law that supply creates its own demand. The model assumes wages and prices are flexible and will adjust to achieve full employment equilibrium in the labor market. If unemployment occurs due to a fall in demand, a general wage cut will increase demand for labor and eliminate unemployment, restoring full employment.
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This document provides an overview of Keynesian theory of income determination. It discusses some key concepts:
1) According to Keynes, the equilibrium level of national income and employment is determined by the interaction of aggregate demand (C+I) and aggregate supply (C+S). This equilibrium is called the effective demand point.
2) Effective demand represents the total spending in the economy that matches aggregate supply. It is the level of income and employment where there is no tendency to increase or decrease production.
3) The effective demand point may be below full employment, indicating underemployment. Government spending can increase aggregate demand and move the economy to a new equilibrium with higher income and full employment.
keynesian theory of income and employment
Keynesian theory holds that aggregate demand drives output and employment. If aggregate demand increases, output will also rise as long as there is excess production capacity. Monetary and fiscal policy can be used to boost aggregate demand and increase output towards full employment. However, fiscal policy expansion may be partly offset or "crowded out" if it raises interest rates and reduces private investment. The effectiveness of fiscal and monetary policy mixes depends on the slopes of the IS and LM curves.
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In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
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Paradox of saving
- 1. PRESENTED BY : Deven-16 Jigna-03 Vibhuti-47 Palak-13 Anuja-18 Nitin-17
- 3. The paradox of thrift states that during a recession, an increase in planned savings (the marginal propensity to save increases) can cause actual savings and investment to decrease.
- 4. SAVINGS Process of putting cash aside safely Eg: gvt securities/bonds, saving a/c’s, FD’s INVESTMENT Process of buying assets Eg: shares, gold, property, stocks, investing in any small business
- 5. SAVINGS INVESTMENT Advantages Peace of mind Future saving Earns interest Grows at good rate Monetary safety Higher returns Disadvantages Less returns Higher risk Flow of money contracts Not available at moment
- 7. The pie-chart below shows the average holdings of financial assets by Indian households between 2000-01 and 2010-11
- 8. Banks Saving Non- Will Have Inflation In Banks Saving Lesser Money Banks More Banks Lend Money Will Not Rise In Money To Will Be Be Able Price Business Spent To Lend Productio n More Productio Money In Supply & n Hands Of Reduces Employm Reduces People ent Saving is related to inflation
- 9. SAVING IS RELATED TO RECESSION Saving In Banks Banks Lend Recession Money To Business Production Unemployment & Employment More Money In Production Hands Of Reduces People Banks Will Not More Money Be Able To Will Be Spent Lend Banks Will Have Lesser Non-Saving Money
- 10. Hoarding doesn’t help the economy.
- 12. BEFORE 1991… History of savings and investments before 1991. Keynes contribution towards savings before 1991. Keynes theory.
- 14. AFTER 1991... Liberalization, privatization, glob alization… Changes after 1991 in Indian economy of savings and investments..
- 16. “Paradox of saving” is an assumption It’s good or bad for economy Saving & investments are going in cycle process Saving leads to recession