CBSE Class 12-commerce Macroeconomics Multiplier Mechanism, Deficit and Excess Demand

Understand the meaning of Multiplier Mechanism and Paradox of Thrift from the CBSE Class 12 Commerce Economics chapter Income Determination by referring to the revision notes, sample papers, past years’ papers etc. at TopperLearning.

In the absence of indirect taxes or subsidies, the total value of the final commodities output is allocated among distinct factors of manufacturing—interest to capital, rent to land, wages to labour etc. If all the people of the economy increase the proportion of the income they save (i.e. if the MPS of the economy increases), the total value of savings in the economy will not increase; it will either decline or remain unchanged. This result is known as the Paradox of Thrift—as people become more thrifty, they end up saving less or the same as before. This result, although it sounds apparently impossible, is actually a simple application as you will learn.