Question

In: Economics

Please explain in three well-structured paragraphs the impact of a change in the savings rate on...

Please explain in three well-structured paragraphs the impact of a change in the savings rate on the output.

Solutions

Expert Solution

Savings rate play a very important role in determining the output of the economy. We say that income is either consumed or saved ie, Y= C+S. On the national income level output depends upon the consumers goods and the producer goods ie, Y=C+I. If we equate these equations we find than S=I. Investments help in boosting the economy towards the path of growth. Determining the most accurate savings rate is very important for the growth of the economy.

When the savings rate changes it affects the level of investment and consumption which ultimately affects the output of the economy. If the savings rate increases this leads to more savings by the people because now people will want to save more to earn a higher return for the future. Thus saving is invested and a higher level of investments reduce the present consumption of the people. This more can be produced and the economy can grow for a longer time period. Higher savings help in financing high levels of investment and also boost productivity over a long term.

If the savings rate reduce then people are demotivated to save more in the present and focus more on present consumption. This the level of investments fall which is not good for the long term. But in the short run an increase in the consumption will increase the demand for consumer goods thereby increasing the output. When the rate of savings is less, the amount of loans increase which can also be used for productive purposes in the present.


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