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1.2.19 Household savings V.s. Business savings
by yiw006 3/12/2011
4. Household savings V.s. Business savings(GWD-12-Q35 to Q37)
Many economists believe that a high rate of business savings in theUnited States is a necessary precursor to investment, because business savings,as opposed to personal savings, comprise almost three-quarters of the nationalsavings rate, and the national savings rate heavily influences the overall rateof business investment. These economists further postulate that real interestrates—the difference between the rates charged by lenders and the inflationrates—will be low when national savings exceed business investment (creating asavings surplus), and high when national savings fall below the level ofbusiness investment (creating a savings deficit).
However, during the 1960’s real interest rates were often higher whenthe national savings surplus was large. Counter-intuitive behavior alsooccurred when real interest rates skyrocketed from 2 percent in 1980 to 7percent in 1982, even though national savings and investments were roughlyequal throughout the period. Clearly, real interest rates respond toinfluences other than the savings/investment nexus. Indeed, real interestrates may themselves influence swings in the savings and investment rates. As real interest rates shot up after 1979, foreign investors pouredcapital into the United States, the price of domestic goods increasedprohibitively abroad, and the price of foreign-made goods became lower in theUnited States. As a result, domestic economic activity and the ability ofbusinesses to save and invest were restrained.
Q35: The passage is primarily concerned with
A. contrasting trends in two historical periods
B. presenting evidence that calls into question certain beliefs
C. explaining the reasons for a common phenomenon
D. criticizing evidence offered in support of a well-respected belief
E. comparing conflicting interpretations of a theory
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Q36:
According to the passage, which of the following resulted from foreign investment in the United States after 1979?
A. An increase in real interest rates
B. A decrease in the savings rate of certain other nations
C. An increase in American investment abroad
D. An increase in the price of American goods abroad
E. A decrease in the price of domestic goods sold at home
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Q37: The author of the passage would be most likely to agree with which of the following statements regarding the economists mentioned in line 1?
A. Their beliefs are contradicted by certain economic phenomena that occurred in the United States during the 1960’s and the 1980’s.
B. Their theory fails to predict under what circumstances the prices of foreign and domestic goods are likely to increase.
C. They incorrectly identify the factors other than savings and investment rates that affect real interest rates.
D. Their belief is valid only for the United States economy and not necessarily for other national economies.
E. They overestimate the impact of the real interest rate on the national savings and investment rates. |
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