How do these items change the private savings supply?

Question

a. An increase in the buying power of assets.
b. An increase in expected future disposable income.
c. A cut in current income taxes.


I guess if the private savings supply is the money that households have after paying for taxes and consumption, that a cut in income taxes would yield a higher savings, but I'm not sure about the other two.

Answer 1

a. An increase in the buying power of assets would allow individuals to save more because it would cost less of their assets to sustain their current level of consumption. It is reasonable to assume all of the extra won't be saved, as some will likely be used to consume more, but saving should increase as well.

b. An increase in expected future disposable income will cause savings to lower, as individuals try to smooth out their lifetime consumption. Thus, individuals will acquire more debt, since they will have the income in the future to pay for some of the consumption now. Either way, even if debt is not used, savings will be diminished.

c. Savings should increase, as individuals should realize that a cut in taxes now will likely cause an increase in taxes later if spending is not cut as well. Thus, individuals will save this money so that it can be used to pay the higher taxes in the future.

Answer 2

a. In this case, the increase would benefit private savings' accumulation, given the fact that the level of consumption remains the same before the increase of buying power of assets.

b. Secondly, individuals would decide to increase their savings, given the fact, as in the first case, that there are not going to be changes in the level of consumption

c. Finally, given that the increase of net income, and assuming there are not going to be increases of consumption level, savings' amount would be higher.

Answer 3

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