Question

Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other financial institutions play in aiding the growth process? LO4

Answer 1

Question- Why is there a trade-off between the amount of consump- tion that people can enjoy today and the amount of con- sumption that they can enjoy in the future?

Answer :- Investment activities increase in the economy's future output potential level. Investment must be funded by saving, which is the only possible if people are willing to reduce current consumption .

Next question:- Why can't people enjoy more of both(consumption now and in the future)?

answer:- Investment must be funded by saving, which is the only possible if people are willing to reduce current consumption.

next question:- How does saving relate to in- vestment and thus to economic growth?

answer:- The only way to fund the investment necessary to increase future consumption is by reducing current consumption in order to gather savings necessary to fund that investement.

next question:- What role do banks and other financial institutions play in aiding the growth process?

answer:-

Help convert savings into investments by taking the savings generated by households and lending it to the businesses that wish to make productive investments thereby promoting economic growth and stability.