The U.S saving rate increased from - 0.2 percent in 2006 to 4.8 percent in 2007

Question

The U.S saving rate increased from - 0.2 percent in 2006 to 4.8 percent in 2007 to 8.7 percent in 2008, to 5.3 percent in 2010. A negative saving rate occurs if A. consumption expenditure exceeds disposable income B. disposable income increases faster than consumption expenditure C. health-care premiums increase D. consumer confidence decreases E. disposable income decreases A negative saving rate might be something to worry about because U.S. saving might be increased by A. eventually households must repay their borrowing decreasing the government budget defeat. B. a negative saving rate leads to recession decreasing the government budget deficit C. eventually households must repay their borrowing decreasing taxes on interest income D. A negative saving rate is illegal decreasing the government budget deficit E. debts cannot be passed to the next generation, decreasing taxes on interest income

Explanation / Answer

A negative saving rate occurs, if consumption expenditure exceeds disposable income.

This is because, when their consumption expenditure increases more than their income, they will now spend their previous spending to match their present expenditure on consumption. As a result savings rate falls.

A negative saving rate might be something to worry about because a negative savings rate leads to recession. This is because when negative saving rate occurs then consumption expenditure exceeds their disposable income, so in that case individual has to borrow money to meet their excess consumption expenditure. And as they borrow they will also need to pay, but in case of negative saving rate, individual has lower savings or no savings to pay their borrowing money. So it is a worry for the economy as more individual has a tendency to default their borrowing.

U.S. saving might be increased by decreasing the government budget deficit. Because in that case government has higher surplus in the country.

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