-- written by Daurie Augostine

Sunday, July 14, 2013

Effective demand

If your answer was "b" to the last post, you're correct!  Answers a, c, and e are equivalent, and all will equal more saving.  More saving (less spending) will hurt the economy.  If you're not sure why, just google the "Paradox of Thift" concept, and see the "aside" below.

Keynes is well-known for the belief that spending drives an economy, and is the reason for my use of his quote in the 7/7/13 post below.  Any type of spending --- household, business, government, or foreign --- will all work, though certain types of spending might have a larger ultimate effect.

Though Keynes is often credited with advocating government spending, in fact, he proposed that private sector spending (mostly household + business) was/is preferable for reducing unemployment.  The point is that, in his opinion, spending (i.e., effective demand) is what moves the economy the most.


An aside:
Do keep in mind that I'm talking about the entire economy from a macro perspective, not whether a household should or shouldn't have saving and debt-reduction goals.  Saving is indeed good for an individual household, but if all households decide to save more, the economy will suffer as a result.