7. In a speech at the CFA Society of Nebraska in February 2007, William Poole, f

Question

7. In a speech at the CFA Society of Nebraska in February 2007, William Poole, former Chairman of the St. Louis Federal Reserve said: Over most of the post-World War II period, the personal saving rate averaged about 6 percent, with some higher years from the mid 1970s to mid 1980s. The negative trend in the . . . saving rate started in the mid 1990s, about the same time the stock market boom started. Thus it is hard to dismiss the hypothesis that the decline in the measured saving rate in the late 1990s reflected the response of consumption to large capital gains from corporate equity [stock]. Evidence from panel data of households also supports the conclusion that the decline in the personal saving rate since 1984 is largely a consequence of capital gains on corporate equities [stocks].

a. Is the purchase of corporate equities part of household consumption or saving? Explain your answer.

b. Equities reap a capital gain in the same way that houses reap a capital gain. Does this mean that the purchase of equities is investment? If not, explain why it is not.

c. U.S. household income has grown considerably since 1984. Has U.S. saving been on a downward trend because Americans feel wealthier?

d. Explain why households preferred to buy corporate equities rather than bonds.

Explanation / Answer

a) its a part of investment activity and hence a saving . Savings are which are kept safe to accumulate for future use where as buying stocks is an investment for growth .For list of household consumptions please see this link http://en.wikipedia.org/wiki/Household_final_consumption_expenditure buying stock is an activity where the money is not consumed and hence it is a saving b)yes purchase of equities is an investment. they may give a capital gain/loss like real estate c) becoming wealthier means an increase in economic activity like investments so less savings . so there was a decline in savings d)corporate equities have more chance of growth than bonds. bonds are low risk low yield financial instruments where as equities are high risk high rewarding instruments. So when an economy is growing people prefer the growth in their money and hence invest in equities compared to bonds which are generally used for savings

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.