Savings gap

Question 1

There are two main reasons for low savings:

Answer 1

1. Low incomes - many people in developing countries don’t earn enough to have money left to save
2. Low access to banks , which are often far away and not always seen as secure

Question 2

A savings gap=

Answer 2

A savings gap is when there is a gap between the amount of money held at banks , in the form of savings, and the amount of money that firms want to borrow from banks.

Question 3

How do low levels of investment affect aggregate supply and demand?

Answer 3

Low levels of investment will keep AD to the left as investment is a component of AD.
Low levels of investment will also keep LRAS to the left as low investment will keep productivity low, which will keep the productive capacity of the economy low.

Question 4

What is the name of the cycle where a savings gap can lead to persistent low economic growth?

Answer 4

The model which links a savings gap to low economic growth is called the Harrod-Domar model.

Question 5

Harrod-Domar model chain of reasoning - low income

Answer 5

Low incomes - Low savings - No money in the bank to lend - Low investment - Low AD and low LRAS - Low economic growth - Low incomes

Question 6

Which of the following best describes a savings gap?

Answer 6

A savings gap is when there is a gap between the amount of money held at banks, in the form of savings, and the amount of money that firms want to borrow from banks.

Question 7

If firms can’t take out loans…

Answer 7

If firms can’t take out loans they won’t be able to invest . This will keep aggregate demand and long -run aggregate supply low or left . This will limit real GDP or Gross Domestic Product meaning incomes will stay low and the savings gap will persist.

Question 8

The cycle that links a savings gap to low economic growth is called

Answer 8

The cycle that links a savings gap to low economic growth is called the Harrod - Domar model.

Question 9

What will happen if more money is saved in Bangladeshi banks?

Answer 9

An increase in savings in banks means that they have more money to lend out. This means that there will be a reduction in the size of the savings gap. In other words, there will be less of a gap between the amount of money the bank has deposited in savings and the amount that it needs to lend out.

Question 10

An increase in investment will increase…

Answer 10

An increase in investment will increase aggregate demand as investment is a component of AD. It will also increase long -run aggregate supply as there will be an increase in productivity. Both of these will increase real Gross Domestic Product or GDP and create economic growth.

Question 11

When people use microfinance loans to invest into their small businesses…

Answer 11

When people use microfinance loans to invest into their small businesses, their productivity increases. This reduces their costs and means they can charge lower prices which makes them more competitive meaning they will earn more in income .

Question 12

What is the impact of higher incomes on the savings gap?

Answer 12

If incomes are higher then savings will be higher as people have more spare money to save after they have bought all the necessities.
Savings will increase and so the savings gap will begin to decrease as the bank has more money available to lend out to firms wishing to invest.

Question 13

How does a reduction in the savings gap affect investment?

Answer 13

The savings gap will begin to decrease as the bank has more money available to lend out to firms wishing to invest. This in turn means that banks lend out more money which leads to an increase in investment.

Question 14

Savings Gaps

Answer 14

A gap between the amount of money held at banks in savings and the amount of money that firms want to borrow from banks.

Question 15

Microfinance

Answer 15

Small loans provided to small businesses who otherwise would have no access to financial services

Question 16

Harrod-Domar Model

Answer 16

A model to explain how low savings make it difficult for firms to be able to invest which limits economic growth.

Question 17

With no extra income, Mandy won’t be able to save money in the bank. This means that

Answer 17

With no extra income, Mandy won’t be able to save money in the bank. This means that there will still be a savings gap and that firms won’t be able to borrow more money. As a result, investment will stay low. Since investment is a component of aggregate demand , this means that economic growth or development will stay limited.

Question 18

Microfinance

Answer 18

Microfinance is a banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services.

Question 19

How should microfinance loans affect small businesses?

Answer 19

Increase productivity → Decreases unit costs → More competitive prices → Increase incomes

Question 20

Chains of reasoning for increased development

Answer 20

The chains of reasoning here are:
Increase investment → Increase AD → Increase economic growth → Increase economic development

Increase investment → Increase productivity → Right shift of LRAS → Increase economic growth → Increase economic development

Increase investment → Decrease unit costs → Decrease prices → More competitive → More profit → More corporation tax revenue → More government spending on development

Question 21

Why might microfinance not lead to economic development?

Answer 21

v high interest rates

Question 22

What might happen if people can’t afford to pay back loans?

Answer 22

If people can’t pay back their loans they may go bankrupt which means that they would have to sell off their business and become unemployed. As a result, they will have lower incomes and…

Question 23

Is microfinance a market based or interventionist policy for development?

Answer 23

Microfinance is a market based policy for development as the government is stepping back their intervention and allowing individuals to develop businesses in the free market.

Question 24

Which of the following best describes what is meant by a savings gap?

Answer 24

A savings gap is when there is a gap between the amount of money held at banks, in the form of savings (deposits), and the amount of money that firms want to borrow from banks (loans).

Question 25

Which of the following is not likely to explain the savings gap seen in many developing countries?

Answer 25

A low marginal propensity to consume
A savings gap is when there is a gap between the amount of money held at banks, in the form of savings, and the amount of money that firms want to borrow from banks.
This occurs because there are low savings in many developing countries. This is primarily due to low incomes and low access to banks.

If incomes are low then consumers won’t have money to spare after purchasing their necessities. Buying the necessities takes up most of their income, and so they have a high marginal propensity to consume - if they were to receive an additional amount of income, they would spend most of it in order to buy necessities like food, water and shelter. A high marginal propensity to consume means they must have a low marginal propensity to save.

Question 26

Which of the following describes what is shown by the Harrod-Domar model?

Answer 26

The Harrod-Domar model describes how low incomes can lead to low savings, which means banks don’t have enough money to lend out. There is therefore low investment, which keeps AD and LRAS to the left and leads to low economic growth.

Low incomes → Low savings → No money in the bank to lend → Low investment → Low AD and low LRAS → Low economic growth → Low incomes