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Precautionary Saving

Saving tends to be sensitive to people’s perceived job security, which is often related to the outlook for unemployment. When the rate of unemployment is increasing, many households - if they can - will look to cut consumption and increase the level of precautionary savings. Ceteris paribus, this will lead to a reduction in aggregate demand in the short term as savings represent a withdrawal from the circular flow of income and spending. These savings provide a buffer against future uncertainty but the evidence is that lower and middle-income families find it harder to save more during an economic downturn and at times of great uncertainty.

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