Question

How and why can the decision of U.S. citizens
to save money cause economic
problems for the economy? So, if the economy
is in a recession, who is
at fault: business, households, or governments
please answer it by typing

Answer 1

Saving,Investment and Consumption are some crucial things in an economy and plays a very significant role in the growth development and expansion of any economy.Income earned or generated is mainly either used for consumption or saving.In simple terms,Consumption is a process of spending the earned money to purchase various goods and services to fulfill the needs and requirements of day to day life.Saving is just opposite this where the person uses his earned money not to spend and consume rather than saving i.e.keeping as deposits or cash etc. for other motives like for precautionary or speculative motives etc.We all have studied that saving leads to leakages in the circular flow of income in the economy.We need to keep in mind that saving is opposite to the consumption.In this process spend and demand less.

Further we need to recall the economic growth or development of any economy is mainly determined by the level of consumption of/demand for goods and services.Recession is a condition in the economy where there is less demand for goods and services in the economy in comparison to the supply.It has far reaching wider implications on the economy and often leads to a vicious cycle of depression which further gradually downgrades the economy and is not good for the economy.This can be explained as follows:

It is true that if the U.S.citizens decide to save money or decide to consume less than it can lead to different types of problems in the economy.This can be explained from two view points.At first if they save more this would result in leakages in the economy i.e.withdrawal of money from the circular flow of income and so their would be less availability of money in the economy,money supply would shrink to some extent,this may lead to rise in intrest rates due to demand of money exceeding the supply.As interest rates would be higher,funds would become more costlier which would discourage the business men from investing more.We know that investment is very crucial for any economy as due to multiplier effect a particular investment leads to many times generation of income in the economy which would generate empoloyment,cosumption and much more.Thus boosting the economy.The other view point is that we all know that production of goods and services is determined by the level of demand and consumption of such goods and services in the economy.The level of production determines the level of income and employment in the economy.Now if consumers consume/demand less or in other words they save more than at existing level of market equilibrium the supply of goods and services would exceed the demand and lead to piling of stocks and inventories.As a result of this and decreased demand the producers would cut down their production and when less would be produced less labourers would be required in the process.So first employers or producrs would try to control the adapt the situation by cutting down wages of labourers and if further the situation worsens,they hire less workers leading to increase in unemployment and hence people would have less income and purchasing power.And again they would demand less and the same process continues leading the economy to an endless vicious cycle of recession and downgrading it.

All the factors i.e.the households,businesses and the government etc. that have a role to play in the determintion of demand or consumption some or the other way responsible for this and are interconnected having wider implications on the economy.In order to get rid of the scenario the govt. should opt for such plans ans policies that would provide more income and employment in the economy so that the consumption can be boosted.The households are also very very important as they mainly form the consumer or demand base so they should consume more and save less but are not solely responsible.The businesses are also crucial but are dependent on others,so they should invest and produce more.These carried collectively in a coordinated manner can help us in getting rid of the problem and taking the econoy to newer heights.