Whenever the economy goes into recession (as occurred most recently in 2008), co

Question

Whenever the economy goes into recession (as occurred most recently in 2008), consumption in the United States decreases.  

A) If the economy went into a recession, but you were not directly affected, do you think you might change your consumption patterns/choices? Do you remember if you or your family changed your spending habits at all during or after the 2008 recession?

B) Following the recession of 2008, the rate of savings in the United States doubled. Why do you think this is? How do you think the increase in savings affected overall consumption? Since, on average, 70% economic activity in the United States is based on consumers (just like you) purchasing goods and services for consumption, how do you think the increase in savings affected aggregate expenditure? Think about “The Paradox of Thrift” as described in your textbook.

Please respond to these questions using your understanding of the aggregate expenditure model.

Explanation / Answer

A) There may be a slight change in the consumption pattern due to the psychological impact on a recession. However, if things are mostly the same, there would not be much change in the consumption pattern.

The second part of this question can only be answered by the individual who has asked this question.

B) Increasing savings is a natural response to a recession as people lose jobs or see a decline in wages and are forced to reconsider their usual consumption pattern.

An increase in savings reduced the overall consumption. The paradox of thrift tell us that individual saving can be harmful to the economy. This is so because one person's spending is another's income. If one person starts to save, another will not be able to generate income. This will lead to a reduction in spending on his part, which will affect another individual. This chain will cause aggregate expenditure to be reduced.

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