Problem
The Paradox of Thrift. The United States has instituted many policies to attempt to increase savings rates in the United States. One such policy was the creation of individual retirement accounts and other incentives for savings. An implication of the incomeexpenditure model is that an increase in the desire of consumers to save will not necessarily lead to highersavings. In fact, total savings will either remain the same or perhaps fall. This is known as the paradox of thrift. Lets see why this is true with an example. a. Suppose I equals 40 and the savings function is S = 100 + 0.4y. Equilibrium income, y, in the economy is 350. Now suppose consumers wish to increase their savings; the new savings function becomes S = 80 + 0.4y. Calculate the new level of equilibrium output and savings after the change in the savings function.
b. Explain why equilibrium savings are unchanged.
c. Now suppose that with a decline in equilibrium income, investment also falls. What would be the effect on equilibrium output and total savings if households now wished to increase their desired savings?
d. What does this suggest about the ability of policymakers to increase aggregate savings by affecting citizens savings rates?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.