Task: Write a 400- to 700-word memo to the economic advisor. Be sure to do the following:
• Identify and describe the effect of changing the savings rate on consumption.
• Calculate the marginal propensity to consume after the change in the rate of savings.
• Calculate and describe the effect of changing the savings rate on the multiplier.
• Describe the likely changes to consumption and equilibrium GDP due to a decline in the savings rate.
THIS IS THE MEMO TO WORK OFF OF:
• Hello, and thanks for volunteering for this assignment! The debates are coming up rapidly, so we're going to get you involved right away. The first topic I'd like you to work on involves savings rates. Mr. Mallon recently read an editorial concerning the savings rate in the United States. According to that editorial, American citizens are saving historically low amounts. In fact, 20 years ago the average savings rate was 20 percent of disposable income. The editorial predicted that this would drop to 5 percent in less than five years. In addition, the author claimed that this fall in the savings rate will have dramatic consequences on economic growth.
• I want you to investigate this issue further—please write a brief memo for Mr. Mallon explaining how the change in the savings rate will affect consumption, the multiplier, and equilibrium GDP. Will reduced savings result in higher or lower GDP? What other effects might this change have on the economy? Don't worry about trying to factor taxes into the analysis; we just want to focus on the savings rate at this point.