Question

1. Considering the impact of the Financial Crisis of 2008, the subsequent recession, and the inability of the US government to agree on basic tenants of fiscal policy:
   1. What impact do these factors have on savings and investment practices in the US?
   2. Is it realistic to expect that tax reform would have the desired effect of increasing savings and encouraging investment as some advocates support?

Answer 1

a) Financial crisis of 2008 and then subsequent recession and inability of the US government to agree on basic financial tenants of fiscal policy has encouraged people to save more for the difficult situations and in times of unemployment and due to this savings has become a good source of investment for the business firms, since due to good amount deposited into the savings accounts, banks are able to lend money to the business firms for their investment into new projects and to increase their production and this has increased economic activity in the US and has increased the employment and decreased the unemployment level and this has increased the aggregate demand and consumption in the economy.

b) Tax reforms could not have desired effect on increasing savings and encouraging investment because after financial crisis of 2008, aggregate demand was very low due to high level of unemployment and when unemployment level is high then tax reforms cannot increase savings and investment since only when people will be employed more in numbers only then they can pay taxes and save more and can demand for goods and services which in turn could have increased the investment by the business firms in their production and new projects and business firms also could have paid more corporate taxes and this had benefited the economy and could have increased the economic activity.

Since when employment level is high and then taxes are reduced then it could have positive impact on increasing savings and encouraging investment, so tax reforms does not work when economy is in recession but can only work when economy is growing and employment level is high and unemployment level is very less/low.