Question

The role of a bank is to move funds from savers to spenders. What happens when savings rates are too high? An example would be people saving so much money that the banks cannot keep up? Would you agree that the United States is in that situation now? What could the Federal Reserve do to help solve that problem?

Answer 1

Consider the savings rate of an economy increased which implies the spending rate is decreasing. It the sending rate decreases it tells us the fact that the businesses start going down and high amount of this will ultimately lead into depression and less government intervene and fills the void ofspending caused by the people. However, this is something that has to be thought of because more and more government spending can lead to high fiscal deficit as well. So either of the way excess saving in an economy is it good for the country at all. However, this is not the case with the United States as the savings rate is only about 2.4% where is the world average is about 25%. If such a case arises the federal reserve should engage people in spending more by decreasing the interest rate so that they can borrow and spend in order to bring back the economy to a saturated position. Therefore the federal reserve must use its instruments in order to keep such a situation under check.