Why might most people, as in the United States, save less than is good for themselves and for the economy as a whole? How might policymakers encourage more saving?
What will be an ideal response?
The saving rate is determined by incentives. If the return on saving is too low, people will choose to consume, instead, even though they are vulnerable to economic misfortune and downturns. Individual vulnerability aggregates to macroeconomic vulnerability, while a low saving rate constrains investment and, thus, economic growth. Policies to increase the saving rate include reducing income tax rates, reducing the tax liability of income that is saved, raising sales tax rates, reducing taxes on the income from savings, and reducing the tax liability of business income that is contributed to employee pensions. It is important, also, to create confidence that inflation will not erode the purchasing power of savings, and that financial crises will not destroy the value of assets.
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Suppose in 2003, President Bush and the Congress made consumer credit harder to obtain. This would have the effect of
a. shifting the investment curve up b. shifting the investment curve down c. shifting the consumption curve up d. shifting the consumption curve down e. increasing the level of investment
One argument offered by economists for having a Social Security system is that if there were no Social Security, workers might
A. overestimate the value of retirement. B. save too much. C. work too long. D. not fully comprehend how hard it might be to continue working into their 70s.