Macroeconomics (savings ratio) Essay Example | Topics and Well Written Essays - 2500 words

Macroeconomics (savings ratio) - Essay Example A change in any factor that has an impact on the consumption apart from the income is said to result in a shift in the consumption function and this would ultimately affect the saving potential of an individual. The factors affecting the consumption function are: A cut in the interest rate will enhance the consumption at all levels of income and will lead to an upward shift in the consumption function. Lower interest rate act to reduce the cost of servicing any mortgage or other debt and thereby increases the effective disposable income in the hands of the homeowners. Contrastingly a period of higher interest rate is expected to curtail the consumer spending. Any apprehension about rising unemployment levels resulting in worsening situations of income level might result in a reduced confidence level of the consumers and a fall in the spending at all levels of income. In contrast to this situation any expectations of improvement in the health of the economy would increase the confidence of the consumers and the resultant planned spending. The changes in the spending behaviour of the consumers affected by the above factors will have a direct bearing on the saving potential of the individuals. ... In contrast to this situation any expectations of improvement in the health of the economy would increase the confidence of the consumers and the resultant planned spending. The changes in the spending behaviour of the consumers affected by the above factors will have a direct bearing on the saving potential of the individuals. The consumption function thus determines the amount of saving that an individual can earmark out of his disposable income towards saving. This ultimately goes to decide the saving ratio which is a factor of the saving against the disposable income. Saving Saving represents a decision to postpone the consumption by saving the money out of the disposable income. There exist a number of motivations behind the saving habits of individuals: Precautionary Saving With a view to avoid the future inconveniences and other potential financial issues that may arise due to unemployment or any other reason, people resort to saving by smoothing their present spending. Building Spending Power Saving presently will enable any one to acquire a future spending power and to meet any major financial commitments at a future data that may arise due to unexpected happenings. Interest Rates and Savings The incentives offered by higher interest rates from banks, building societies and other financial institutions may generate more willingness to save. Desire to Bequeath Strong desire to bequeath more wealth to future generations act as a strong motivator for saving habits Impact of Life Cycle of Consumers At the young age the consumers may borrow more to meet their commitments and once they become older with the easing of