Macroeconomics 11th Edition by Michael Parkin

Exercise 4

Use the information in Problem.
a. U.S. household income has grown considerably since 1984. Has U.S. saving been on a downward trend because Americans feel wealthier?
b. Explain why households preferred to buy corporate equities rather than bonds.
Problem
In a speech at the CFA Society of Nebraska in February 2007, William Poole (former Chairman of the St. Louis Federal Reserve Bank) said: Over most of the post-World War II period, the personal saving rate averaged about 6 percent, with some higher rates from the mid-1970s to mid-1980s. The negative trend in the saving rate started in the mid-1990s, about the same time the stock market boom started. Thus it is hard to dismiss the hypothesis that the decline in the measured saving rate in the late 1990s reflected the response of consumption to large capital gains from corporate equity [stock]. Evidence from panel data of households also supports the conclusion that the decline in the personal saving rate since 1984 is largely a consequence of capital gains on corporate equities.
a. Is the purchase of corporate equities part of household consumption or savingExplain your answer.
b. Equities reap a capital gain in the same way that houses reap a capital gain. Does this mean that the purchase of equities is investmentIf not, explain why it is not.