Suppose That People Finally Realize That They Must Save a Larger

question 21

Essay

Suppose that people finally realize that they must save a larger proportion of their income in order to retire and that they simultaneously begin to use new technology that allows them to reduce their holdings of real cash balances as a proportion of their income. Use the IS-LM model to illustrate graphically the impact of these two changes in household behaviour on output and interest rates. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values.

---

Definitions:

Beta Coefficient

The beta coefficient measures the volatility of a stock or portfolio in comparison to the market as a whole, indicating its relative risk.

Systematic Risk Factors

Factors that affect the overall financial market and cannot be mitigated through diversification. These include interest rates, inflation, and economic recessions.

Economic Events

Economic events are occurrences with economic impact that affect an entity's financial position and performance, including transactions and market fluctuations.

Market Risk

The likelihood that investors might face losses because of issues impacting the general functioning of the financial markets.