The Paradox of Thrift states that if all the people of the economy increase the proportion of income they save (i.e., if the mps of the economy increases), the total value of savings in the economy will not increase. Instead, it will either decline or remain unchanged. This means that as people become more thrifty, they end up saving less or the same as before.

This phenomenon occurs because an increase in thrift implies a decrease in the marginal propensity to consume (mpc). For instance, if people become more conservative due to an impending disaster, the mpc might decrease (e.g., from 0.8 to 0.5). At the initial income level, this leads to a decrease in aggregate consumption spending and hence in aggregate demand.

This reduction in consumption acts as an autonomous reduction in expenditure. Consequently, producers reduce production, leading to a fall in the equilibrium income level. Since savings are a function of income, a fall in income limits the ability to save.

Thus, the paradox highlights that though it sounds apparently impossible, individual attempts to save more lead to a collective reduction in income, resulting in total savings remaining unchanged or declining. This is a simple application of the macroeconomic model.