Reflecting What Is Being Referred to as the ʺNew Normalʺ

Reflecting what is being referred to as the ʺnew normalʺ, consumer spending is down, home sales have
declined, and personal savings has risen since the start of the recession in 2007, and the continuation of this
trend is threatening the economic recovery in the United States. In June 2010, factory orders fell for the
second consecutive month, home sales fell by nearly 19 percent compared to June 2009, and personal
spending and income remained relatively flat. The personal savings rate, however, has continued to increase,
reaching a level of 6.4 percent of after-tax income in June 2010, which is more than three times higher than
the average savings rate prior to the start of the recession in 2007. The increase in savings is coming at the
expense of consumer spending, and economists worry that households’ financial problems could cause a
further decline in spending for the second half of 2010.
-The relationship between consumer spending and saving discussed in the Application addresses the economic principle of

A) opportunity cost.
B) diminishing returns.
C) thinking at the margin.
D) real versus nominal.