Answer to Question #177830 in Macroeconomics for sss

Question

Suppose that, at any given level of disposable income, everyone in the economy decides to save more. What would be its effect on the level of savings, consumption and output, in equilibrium.  

Answer 1

Suppose that, at any given level of disposable income, everyone in the economy decides to save more. What would be its effect on the level of savings, consumption and output, in equilibrium?

An increase in the saving rate will lead to higher growth of output per worker for some time. If people save more, it enables the banks to lend more to firms for investment. An economy where savings are high means that the economy is choosing long-term investment over short-term consumption.

In the short term, a rise in savings could cause a fall in consumer spending, leading to a recession. Consumption plus saving is equal to disposable income; thus, an increase in the savings rate will mean consumption decreases holding income constant.

If everyone in the economy decides to save more, the savings level will increase, which will provide banks with money to lend and investments increase.