Running head: IS SAVING BAD FOR THE ECONOMY
University of Phoenix
Effect of Savings on Economy
This paper is an analysis of the article "Is Saving Bad for the Economy?" by Frank Shostak. It will discuss the circular flow of goods and services as well as summarize the article's main point. As stated in the book Economics by David Colander, the economy is a circular flow in which output and input are interrelated. This relates to the article at hand clearly and somehow it goes along side by side with what Shostak had discussed in his article.
The article discusses the concern of the Fed's Open Market Committee in year 2001 that consumers might boost their savings thereby weakening the economic expansion. Shostak goes further by stating that savings could be detrimental to the economy as it weakens the demand for goods and services. He also describes the how is the economy is a circular flow of money by giving several examples. He states that what one person spends is consider as earnings for another.
Shostak also asserts on the consumer's confidence in the role of saving. He describes how a person not confident with the future will cut back on spending or "hoard more money". To treat this issue, he exclaims that some people think that the central bank should put more money in peoples' hands to elevate their confidence and therefore the circular flow of money will reassert itself. Shostak asserts that this approach is bad because every activity has to be funded, it follows that an increase in consumption that is not supported by production must divert funding from wealth-generating activities. This, in turn, diminishes the flow of real savings to the producers of wealth, which weakens the flow of production, which sets in motion an economic r ...