Reference no: EM13846505

Q1

1. The increasing of ageing population might lead to certain issues; the first one we need to face will be the public debt. Ageing population when they retired, the consumption exceeds income and investments will exceed Savings. Like Australia, when people reach 65 , they would able to withdraw the money from superannuation, use it for different purposes such astravel oversea, buy a new house etc.

2. Increase in the dependency ratio. Ageing population will lead to more people claiming pension benefits and less people working and paying income taxes which are a big worry it will put big pressures to younger generation who are working hard and charging high tax rates. If a country with a very generous welfaresystem that might be a very big concern which also can reduce working impetus for young workers.

3. Increased government spending on health care and pensions.Such as retirement homes, public hospitals are required big resources which means government might need to spend more money on public health and pensions but with limited funds for other area investment. Ageing population tend to pay lower income taxes because they are not working. For example, inAustralia, when people reach 65 , they would able to access the money from superannuation, use it for different purposes such as travel oversea, buy a new house etc.

4. Those in work may have to pay higher taxes. This could create disincentives to work and disincentives for firms to invest; therefore there could be a fall in productivity and growth.

5. Shortage of workers. An ageing population could lead to a shortage of workers thereforecompanies might need to increase the wages to encourage more people to enter the workforce. We also can explain it as there is a big demand but limited supply in workers market which also might lead toWage inflation.  That might lead to companiesshift their business to other countries with lower labour cost.

6. Changing sectors within the economy. An increase in the numbers of retired people will create a bigger market for goods and services linked to older people (e.g. retirement homes)

7. Higher savings for pensions may reduce capital investment. If society is putting a higher % of income into pension funds, it could reduce the amount of savings available for more productive investment, leading to lower rates of economic growth.

Q2.

(i) The aging population will start using their saving when they retired for different purpose. So supply will shift to the left because there is less saving left which means less supply, as the result we can see,the increase of interest rate and decrease of loanable funds will occurred.

(ii) The investment appetite of emerging economies is growing therefore the demand of loanable funds will shift to the right (an increase), also as the diagram showed it even increasing the interest rate further up and at the same time it increase the equilibrium level of loanable funds as well.

As the result, both factors will drive interest rate up, but the final equilibrium level of loanable funds can be more or less than Point A, it depend on the change range of supply and demand factors.If supply decrease more than demand growth, so the equilibrium of loanable funds will be less.