PLEASE TYPE YOUR ANSWER 9. Savings rates tend to rise during recessions. Why? Do
ID: 1109689 • Letter: P
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PLEASE TYPE YOUR ANSWER
9. Savings rates tend to rise during recessions. Why? Do you think a higher savings rate would ease or exacerbate a recession. Explain your answer. How might a higher savings rate improve long-term economic growth? 10. The only potential bright spots some observers see on the horizon is the lower personal tax rates and higher take-home pay under the federal tax reform that will begin at mid year. Why might this be a bright spot? How might lower tax rates affect individual incentives spend, save, and investment 11. A report attributed the strength in the recovery during the first three months of this year to increased consumer spending and residential construction, as well as a reduced rate of inventory liquidation. Explain how increased consumer spending and a reduced rate of inventory liquidation contributes to the recovery. 12. Give examples of countries in which consumer spending's share of GDP might be excessive? Give examples where it might be considered to be too small? Explain your answersExplanation / Answer
The primary cause of the recession is higher savings and lower spending. Lower spending reduces the aggregate demand and hence lower the economic output. In this recession time, banks prefer to slightly lower the interest rate to boost the economy by raising aggregate demand. At lower savings rate people tends to lower their savings and consume more which helps to boost the economy.
A decrease in savings rate has two effects. One is the substitution effect, by which people save less as the reward from savings fall. Other is income effect by which people save more. Savers receive lower income payment. A pensioner who receives payment from savings feel need to save more to maintain the standard of living.
Usually, substitution effect dominates the income effect. So the banks usually try to down the savings rate to stimulate the economy during the recession. The low-interest rate encourages borrowing and spending which will help long-run growth.
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