Precautionary Saving

Household Response to a Wealth Shock

A household learns that their expected future retirement income will be substantially lower than they had previously planned for. According to the concept of a desired wealth level, how would this new information most likely affect the household's current financial behavior?

Determinants of Desired Wealth

According to the principle of a desired wealth level, a household that receives an unexpected financial windfall will always increase its current spending by the full amount of the windfall.

Household Financial Adjustments and Desired Wealth

A household has a desired wealth target of $500,000. Their current wealth is composed of a $350,000 house, $100,000 in a savings account, and $50,000 in stocks, totaling exactly $500,000. A sudden, sharp downturn in the financial markets causes the value of their stock portfolio to fall to $20,000. How is this household most likely to adjust its financial behavior in the short term?

Match each economic scenario for a household with the most likely behavioral adjustment, based on the principle that households try to maintain a desired level of wealth.

Two households, both with similar long-term financial goals, each receive an unexpected inheritance of $50,000. Household A immediately spends the entire amount on a luxury car. Household B uses $40,000 to pay down their mortgage and puts the remaining $10,000 into their retirement savings account. Which of the following statements best analyzes the situation based on the principle that households aim to maintain a desired level of wealth?

If a household's actual accumulated wealth drops significantly below its desired level, the household is most likely to increase its rate of ______ in order to rebuild its assets.

A household discovers that due to a large, unexpected future expense, their current accumulated wealth is now insufficient to meet their long-term financial goals. According to the principle that households try to maintain a target level of wealth, arrange the following events in the most logical sequence.