Question

Current predictions indicate that if nothing is done the Social Security trust fund will run out in 2035. After this point, retirees will only receive about 75% of their scheduled benefits. As a result, the 25-35 year old labor force has decided to begin saving a larger share of their income for retirement.

a) What effect might this have on aggregate demand? Increase or decrease?
b) Which component of aggregate demand would be effected?
c) Will this change your saving habits? Why?

Answer 1

a. This behaviour will decrease the AD. This is because as people will start saving more, they will spend less. Due to this, AD curve will shift backwards or AD will decrease.

b. If people start saving more, they will consume less. Thus, the consumption component will reduce.

c. This will change the saving habits. This is because people will become aware of the fact that they need to save for their old age because the social security system will not be enough to meet their demands.