Answer to Question #174107 in Macroeconomics for Jackson

Question

Saving is setting aside money you don't spend now for emergencies or for a future purchase. In an economy the saving function is specified as S = -a + bYd. Using the above information what the effect will be on an economy if everybody in the economy saves thereby increasing the saving function.

10 ma

Answer 1

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The savings ratio a big determinant of an economy .Rise in the savings ratio can have a very significant impact on an economy.

Higher savings can help finance higher levels of investment and boost productivity over the longer term.

More saving by people, will enables the banks to lend more to firms for investment.

In the short term more saving will starve the economy of investment can lead to future bottlenecks and shortages.

could lead to a recession in the short term due to fast increase in savings which could lead to a drop in consumer spending. where in this circumstance, a rapid rise in saving does not cause an equivalent rise in investment

If everyone saves at the same time, aggregate demand will fall, resulting in a slump causing the Paradox of Thrift a term coined by Keynes to describe this situation.

Despite an increase in deposits, banks will be hesitant to lend to businesses due to the bleak growth prospects. In addition, even though banks are willing to lend at low rates, banks may not want to invest during a recession.