Question

How is an increase in savings a boost to the economy in the long run? How can more saving have a negative impact on the economy in the short run?

Answer 1

Increase in savings helps in capital accumulation in the long-term through investment spending. In the absence of savings, there will be no investment and capital accumulation. Capital accumulation increases the productive capacity of an economy. Therefore, the production possibility curve shifts out and the economy can have a higher output and a higher standard of living.

In the short-run, higher savings leads to lower consumption. Lower consumption leads to a fall in aggregate demand. When the aggregate demand falls, output falls and unemployment rises.