Subsequently, how much truth is in the statement that,
“One’s income determines the amount one saves, but the interest rate determines how it is saved”.
There are several factors that determine from economical point of view, what might incline people and firms, to save money instead of spending them; some of them are:
• Demand for money
• Disposable Personal Income
• Propensity to Consume
• Consumer Confidence Index
• Interest Rates
The consumer’s Disposable Personal Income; which in simple terms is our after-taxes money, will determine to some degree, how much one is willing to save, and most definitely how much one is able to save.
The Propensity to Consume in economics, is the ratio of total consumption to the total income; in other words how much of their income the consumer will rather spend than save. The Propensity to Consume might be influenced by many factors; one of which, could be the interest rates.
Furthermore, the Demand for Money, which is the relationship between the quantity of money, that people want to hold, and some factors that might determine the quantity, dictates to a certain degree how much people save, and if they do save at all.
In addition, the Consumer Confidence Index is known to be a crucial factor, determining whether there is demand for money or not; people tend to save more during recessionary gaps, expecting tough times ahead. Likewise, people tend to save less when the economy operates at its optimal state, ...
... middle of paper ...
and other financial assets might definitely shift the demand one way or the other.
Transfer cost is the cost the consumer pays for transferring the money between money and non-money deposits; for instance transferring money between a checking account, and non-money deposit such as bonds might incur certain fees which will determine the profitability of such transfer. Lower transfer fees usually lower the demand for money.
Preferences certainly play a role in demand for money; for the reason that people’s attitudes toward risk and yield, will determine to some degree how much cash will they hold.
To conclude, I would like to emphasize, that the changes in the demand for money, are closely related to the changes in the bond market; as the interest rates determined in the bond market, are consistent with the interest rates in the money market.
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