188 Assignment Solution: Baby Boomers
Solution
This problem asks students to apply the theory of supply and demand to financial markets as is done in this module. Mid-career workers tend to have a high saving rate, while retirees do not. An exodus of Baby Boomers from work to retirement will lower their saving rate. Since the Baby Boomers are a lower than average demographic cohort, they will not be replaced by the same number of entry level workers. As a consequence, the average U.S. saving rate should fall. We can show this by a leftward shift in the supply of financial capital, which will raise the equilibrium saving rate.