How would the following events affect aggregate saving priva

How would the following events affect aggregate saving (private & public) in the United States? Hint: Distinguish between expectations and actual changes.

A.) News of a discovery of oil reserves in Montana 10 times as large as those in the Middle East.

B.) Theeconomygrowstwiceasfastasexpected,owingtohigherproductivity growth, so unemployment falls substantially.

C.) Reconstruction projects in Eastern Europe require $1 trillion, causing an increase in the world real interest rate.

Solution

A. In North Dakota and Montana’s Bakken Formation, 3 to 4.3 billion barrels of technically recoverable oil has been assessed which is 25 times more than the 1995 estimate. The theory of adaptive expectations says that people will form future expectations based on past events. The news of a discovery at this time may not be overwhelming and there shouldn’t be a real impact on the aggregate public saving in the US.

B. The paradox of thrift says that if people try to save more money, then aggregate demand thereon the income will fall because the tendency to save is directly related to the amount of income received. Even when individuals attempt to increase savings the total saving may fall. In general individual thrift considered good for the economy whilst a collective thrift may be bad for the economy. Simply, what is true of the parts must be true for the whole.

C. The increase in the world real interest rate could shift the investment function. Investment increases relative to savings. There will be an increase in investment, savings also rise with capital flowing into the country and the expected return to capital increases.

*****