Question

How does private savings impact investment? Why is it important for individuals to save in an economy? How do public policies such as tax policies affect savings rates? How do government budget deficits affect interest rates?

The US is running record budget deficits. Define crowding out. Look for an article talking about it. Do you think it's a problem? Why or why not?

Answer 1

Ans-1Private savings equal to the sum of household and business savings. Savings are indicative of how much the people of a country are likely to invest because more the savings, more the investment. In the last few years, returns from real estate investments have suffered, affecting household disposable income.

Ans-2 Saving is important to the economic progress of a country because of its relation to investment. If there is to be an increase in productive wealth, some individuals must be willing to abstain from consuming their entire income.

Ans-3 Tax is a compulsory payment made by producers and households to the government. Tax are of two types:1) Direct tax- Corporate tax

2) Indirect tax- Goods and service tax.

When the effect of the average personal income tax rate is taken in account, the corporate income tax also appears to lower the saving rate. When the tax rate decreaes, people tends to save more.

Ans-4 When an increase in government expenditure or a decrease in government revenue increases the budget deficit, the Treasury must issue more bonds. This reduces the price of bonds, raising the interest rate.

A budget deficit implies lower taxes and increased Government spending (G), this will increase AD and this may cause higher real GDP and inflation.

Ans-5 Crowding out is a phenomenon that occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market.

Asa result of this competition, the real interest rate increases and private investment decreases. This is phenomenon is called crowding out.

Most economists agree that deficit spending is not in itself a problem. In fact, deficit spending might even be necessary during severe recessions.