Question

An increase in household saving causes consumption to a. fall and aggregate demand to increase. b. rise and aggregate demand to increase. c. rise and aggregate demand to decrease. d. fall and aggregate demand to decrease.

Answer 1

Answer: d. fall and aggregate demand to decrease.

Explanation: When household savings increase, the consumption will fall, as the money which should be spent on consumption such as food, clothing and other products will reduce in other to foster household saving. Also, aggregate demand which is used to measure the total amount of demand for goods and services produced in an economy will also decrease as increase in aggregate demand will inadvertently lead to decrease in household saving.

Therefore, increase in savings requires reduction in spending and demand for products.