| 2. Media quote: "Personal saving habits peaked in the early 1970s, when average U.S. residents stashed away over 9 percent of take-home pay, and declined through the 1980s to a low of less than 3 percent. It seems that they prefer to cut down on their saving to maintain living standards: the catch is that a low saving rate makes it harder to increase living standards." Explain this saving paradox. |
| Like the second part of the answer to question 1, the issue here concerns the long-term consequences of reduced savings on the capital stock and the production capacity of the economy. Reduced saving today certainly allows people to consume more. But it leads to a rise in the real interest rates, lower investement, and reduced income in the future. |