Reference no: EM132413393

Policies and economic changes affecting consumption have far-reaching consequences on people and the state of an economy. Please provide concise answers to the following questions:

a) What will happen to consumption (present or future) if interest rate goes up?

Policies and economic changes affecting consumption have far-reaching consequences on people and the state of an economy. Please provide concise answers to the following questions:

A) Higher interest rates are thought to affect consumer spending because of direct impacts to income as well as through substitution. Higher interest rates are thought to lower consumption in the present or future when interest rates rise because the cost related to current consumption increases and becomes more expensive than savings. Households should if they are acting rationally increase their savings rate which would decrease their consumption as interest rates rise.

b) How effective government policy can be with regard to changing interest rate or taxes?

B) Monetary policy involves the management of the money supply and interest rates by central banks. To assist the economy, a government will cut tax rates while increasing its own spending; to cool down an overheating economy, it will raise taxes and cut back on spending. Government policy on interest rates and taxes can certainly be effective by providing stimulus when the economy is sluggish and taking that stimulus out of the market when the economy is in a period where economic growth is increasing causing the potential for inflation. Interest rate adjustments and tax changes for taxpayers are simple ways government policy can put money into the economy to encourage or discourage spending. They are often utilized by governments around the globe. The argument is the more money in the hands of consumers, the more they will spend which in and of itself promotes economic growth. If the economy is beginning to grow and inflation is a threat, government policy changes to taxes and interest rate can raise the cost of borrowing and that can impact or thwart present and future spending until prices or interest rates moderate. The rise in rates typically causes people to delay major purchases or thwart some spending since the cost of borrowing increases. It may also prevent some borrowers from being able to borrow money for items because the banks might not be willing to lend money to individuals who can't meet certain lending threshold requirements.

c) Economic impact of having strong and supportive social security in old age on saving behavior of people within various countries?

In my opinion, the impact of having strong and supportive social security in old age is extremely important and has a positive impact on society as a whole. The assurance that all individuals who will receive Social Security benefits that at least provide partial replacement income for those who are retired or medically disabled as well as for their spouses, and children ensures that a modest amount of income continues to arrive in retirement or in the untimely event of ones passing. This strong and supportive social security program keeps people with at least a modicum of income coming in throughout their lifetime and is in large part paid for by social security taxes paid by employers and employees. There is significant economic benefit derived from individuals having a set and steady amount of money coming in that they can use to ensure they have access to housing, food, and basic necessities. The overall impact from studies on the economic impact have proven this is a vastly beneficial program. Nearly every country that has this type of program is benefited from these expenditures.

However, in terms of the impact on savings, an important aspect to discuss is the impact that a strong social security system has on the saving rate and behavior of people. Households throughout the country and around the world will have strong differences in wages, savings, and as a result wealth accumulation. Those households that have lower levels of earnings and less members of the household earning wages will most likely be living paycheck to paycheck and not be saving much for retirement. In addition, many are counting on social security in some instances to be a primary source of their income when they retire. As a result, many in societies worldwide that have these program continue to save little and are more apt to heavily depend on public social programs to maintain the basic expected standard of living. As a result, top wage earners will likely rely less on societal programs and will likely be forced to increase their savings to maintain their standard of living. As individuals live longer, many are outliving their retirement resources putting a strain on these programs putting additional costs on either family members or government programs like social security and Medicare to aid in covering those costs. The unintended consequences for these programs like social security is that it has resulted in people saving less of their own money for retirement because of the benefits they believe they will receive through the governments.

These programs are viable and have a great economic impact on societies worldwide and generate many other benefits for society holistically. While adjustments may need to be made to keep them financially solvent, they play a major role in having a consistent steady flow of spending throughout our society. As the population ages without significant replacements that is occurring in many industrialized nations, we will likely see even discussion regarding means testing or raising of taxes to keep these programs solvent. That being stated, the economic impact of individuals who receive social security is positive because most recipients immediately spend that money or save it allowing banks to push money back into the economy. These have profound defined positive economic impacts and leaves most of society with a safety net to ensure some basic income needs are met once individuals are no longer actively working.