Savings and aggregate demand - Determinants of savings Flashcards
(12 cards)
What is saving in economic terms?
Saving is the part of disposable income that is not spent on goods and services.
How does an increase in savings affect Aggregate Demand (AD)?
If savings increase, consumption falls, leading to a leftward shift in AD.
How does real disposable income affect saving?
As income rises, people tend to save more because basic needs are already covered. Poor households save less as most income goes to consumption.
What is the effect of interest rates on saving?
Higher interest rates encourage saving due to greater returns; lower rates discourage saving and encourage spending or borrowing.
How do interest rates affect the Marginal Propensity to Save (MPS)?
Higher interest rates increase MPS (people save more); lower interest rates decrease MPS and increase MPC (people spend more).
How does consumer confidence influence saving behavior?
When consumer confidence is low (e.g., fear of recession or job loss), people are more likely to save rather than spend.
How do financial institutions affect saving in an economy?
In economies with trustworthy, accessible banks, saving is easier and more common. In developing or corrupt systems, people may avoid saving due to lack of trust or access.
How does financial literacy affect saving behavior in developing countries?
In developing countries, low financial literacy means many people don’t understand how banks work or the benefits of saving, which reduces saving levels.
How does the quality of financial institutions affect saving?
Weak, corrupt, or inaccessible financial institutions discourage saving, especially in developing countries, as people lack trust or access.
What are ISAs and how do they affect saving?
ISAs (Individual Savings Accounts) offer tax-free returns on savings up to a limit, providing a tax incentive to save more.
How do tax incentives influence saving?
Tax incentives like ISAs reduce the tax burden on savings, making saving more attractive and increasing the marginal propensity to save.
How does the age structure of the population affect saving?
Middle-aged people tend to save more for retirement and children; younger people (15–30) and retirees often save less and spend more.
