Question

Disposable income of Americans decreases along with their savings rate. Explain the impact on economic growth.

Answer 1

we think that savings is a key contributing factor to capital development and business investment. So if disposable income decreases their will be less spending (C component of GDP decreases) but savings is also going down so there will be less business investment to match so I component will also decrease. This is actually worse for our long term economic growth prospects because capital goods allow us to delay current consumption but for future consumption. A drying up of savings, decreases capital investment, which decreases future consumption as well!

Answer 2

Thank you!