What Are The Factors Affecting Saving And Borrowing Decisions?


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Mehreen Misbah Profile
Mehreen Misbah answered
Saving and borrowing are options that an individual takes after weighing out the positive and negative outcomes of each option.

Saving is a favorable option specially when there is a demand for borrowing. This is the exact point, which connects the two phenomena. Even though the factors that affect the saving decisions are few, yet they are vital to consider when it comes to the prospect of deciding between consuming or saving. The first factor that affects saving, as mentioned previously is the demand for borrowing, which in turn, shares a positive relationship with saving. That is, if the demand of borrowing increases, the individual would be encouraged to save so that he could generate loans and earn a high rate of interest. Other factors that affect the saving decisions are earned income and interest rate, both of which are also directly proportional to the saving decision.

As for borrowing, normally people are motivated to borrow when the opportunities of profitable investment are ripe. And then the gain from past investments is also a major factor in shaping the decision for the individual to borrow. As for firms, their demand for borrowing is negatively related to the interest rate (which is in direct contrast with the saving decisions as interest rate is positively related to savings). As long as the interest rate exceeds or equals the marginal productivity of capital, the firm will continue to borrow. These are the major wholesome dimensions that an individual or firms ponder over before deciding on the idea of borrowing.

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