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If the interest rate is decreased in an economy, it will __:
- a)decrease the consumption expenditure in the economy
- b)increase the tax collection of the Government
- c)increase the investment expenditure in the economy
- d)increase the total savings in the economy
Correct answer is option 'C'. Can you explain this answer?
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If the interest rate is decreased in an economy, it will __:a)decrease...
Decreased interest rates would ensure availabilty of capital for investment expenditure
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If the interest rate is decreased in an economy, it will __:a)decrease...
Decrease in Interest Rate and its Impact on Investment Expenditure in the Economy
Explanation:
When the interest rate in an economy decreases, it has a positive impact on the investment expenditure in the economy. This can be explained by the following factors:
1. Cost of Borrowing:
When the interest rate is decreased, it becomes cheaper for businesses and individuals to borrow money from financial institutions. This reduction in the cost of borrowing encourages businesses to take loans for financing their investment projects, such as setting up new factories, expanding existing operations, or investing in new technology. As a result, the investment expenditure in the economy increases.
2. Increased Profitability:
Lower interest rates lead to increased profitability for businesses. When the cost of borrowing decreases, businesses can invest in projects with higher returns and profitability. This incentivizes them to increase their investment expenditure, as they expect to earn higher profits in the future.
3. Stimulating Demand:
Lower interest rates can also stimulate demand in the economy. When businesses increase their investment expenditure, it leads to the creation of job opportunities and income generation. This, in turn, increases the purchasing power of individuals and boosts consumer spending. As a result, the overall demand in the economy increases, leading to further investment opportunities for businesses.
4. Monetary Policy:
Central banks often decrease interest rates as a part of their monetary policy to stimulate economic growth. By reducing interest rates, central banks aim to encourage borrowing and investment, which can help in increasing economic activity, reducing unemployment, and promoting overall economic growth.
Therefore, when the interest rate is decreased in an economy, it leads to an increase in the investment expenditure. This, in turn, boosts economic growth, creates employment opportunities, and contributes to the overall development of the economy.
Explanation:
When the interest rate in an economy decreases, it has a positive impact on the investment expenditure in the economy. This can be explained by the following factors:
1. Cost of Borrowing:
When the interest rate is decreased, it becomes cheaper for businesses and individuals to borrow money from financial institutions. This reduction in the cost of borrowing encourages businesses to take loans for financing their investment projects, such as setting up new factories, expanding existing operations, or investing in new technology. As a result, the investment expenditure in the economy increases.
2. Increased Profitability:
Lower interest rates lead to increased profitability for businesses. When the cost of borrowing decreases, businesses can invest in projects with higher returns and profitability. This incentivizes them to increase their investment expenditure, as they expect to earn higher profits in the future.
3. Stimulating Demand:
Lower interest rates can also stimulate demand in the economy. When businesses increase their investment expenditure, it leads to the creation of job opportunities and income generation. This, in turn, increases the purchasing power of individuals and boosts consumer spending. As a result, the overall demand in the economy increases, leading to further investment opportunities for businesses.
4. Monetary Policy:
Central banks often decrease interest rates as a part of their monetary policy to stimulate economic growth. By reducing interest rates, central banks aim to encourage borrowing and investment, which can help in increasing economic activity, reducing unemployment, and promoting overall economic growth.
Therefore, when the interest rate is decreased in an economy, it leads to an increase in the investment expenditure. This, in turn, boosts economic growth, creates employment opportunities, and contributes to the overall development of the economy.
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If the interest rate is decreased in an economy, it will __:a)decrease the consumption expenditure in the economyb)increase the tax collection of the Governmentc)increase the investment expenditure in the economyd)increase the total savings in the economyCorrect answer is option 'C'. Can you explain this answer?
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