The Paradox of Thrift: Consider the simple model of the good markets: Y=C+I+G C=C0+C1(Y-T) I=I0-I1r G=bar G T=bar T Saving in the simple model of the goods market is defined as S = Y - C - G

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The Paradox of Thrift: Consider the simple model of the good markets:

Y=C+I+G

C=C0+C1(Y-T)

I=I0-I1r

G=bar G

T=bar T

Saving in the simple model of the goods market is defined as S = Y - C - G. (a) Using the goods market equilibrium and the definition of saving, find the predicted change in aggregate savings if consumers decided to save more (C0 ). Explain why the effect of an aggregate increase in savings is called a paradox using your answer.