Question

The U.S. saving rate increased from -0.1 percent in 2011 to 2.0 percent in 2012, to 2.4 percent in 2013, to 2.9 percent in 2014, and to 3.0 percent in 2015.

Explain why the U.S. saving rate might have increased and its effect on the supply of loanable funds.

Answer 1

The US saving rate started increasing from 2008 i.e. the onset of the recent financial crisis. Clearly, US consumers wanted to reduce their indebtedness and save more with the anticipation of a lower future income. They were cautious about economic recovery and future income prospects, which led to higher saving and low spending.

Increased saving increases the supply of loanable funds. When people save more, this increases available funds for lending in the economy as banks receive more deposits, which can be extended as loans.