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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 willa)Decrease the...
Interest rate cut makes investment (borrowing) cheaper which makes 'investment expenditure' in the economy go upward.
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If the interest rate is decreased in an economy, it willa)Decrease the...
Effect of Decreasing Interest Rate in an Economy
Increasing Investment Expenditure
Decreasing the interest rate in an economy typically leads to an increase in investment expenditure. When interest rates are lower, businesses find it cheaper to borrow money for capital investments. This encourages businesses to expand their operations, invest in new technologies, and create new job opportunities. As a result, the overall investment expenditure in the economy increases, leading to economic growth.
Impact on Consumption Expenditure
Contrary to the belief that decreasing interest rates would decrease consumption expenditure, the opposite is often true. Lower interest rates make borrowing cheaper for consumers as well. This can lead to increased spending on big-ticket items such as homes, cars, and appliances. As a result, consumption expenditure may actually increase in response to lower interest rates.
Effect on Total Savings
While lower interest rates may incentivize spending and investment, they can also impact total savings in the economy. With lower returns on savings accounts and other interest-bearing investments, individuals may be less inclined to save money. This can lead to a decrease in total savings in the economy, as people may choose to spend or invest their money instead of saving it.
In conclusion, decreasing the interest rate in an economy is likely to increase investment expenditure, potentially boost consumption expenditure, and may have a mixed impact on total savings. It is important for policymakers to consider these various effects when making decisions about monetary policy.
Increasing Investment Expenditure
Decreasing the interest rate in an economy typically leads to an increase in investment expenditure. When interest rates are lower, businesses find it cheaper to borrow money for capital investments. This encourages businesses to expand their operations, invest in new technologies, and create new job opportunities. As a result, the overall investment expenditure in the economy increases, leading to economic growth.
Impact on Consumption Expenditure
Contrary to the belief that decreasing interest rates would decrease consumption expenditure, the opposite is often true. Lower interest rates make borrowing cheaper for consumers as well. This can lead to increased spending on big-ticket items such as homes, cars, and appliances. As a result, consumption expenditure may actually increase in response to lower interest rates.
Effect on Total Savings
While lower interest rates may incentivize spending and investment, they can also impact total savings in the economy. With lower returns on savings accounts and other interest-bearing investments, individuals may be less inclined to save money. This can lead to a decrease in total savings in the economy, as people may choose to spend or invest their money instead of saving it.
In conclusion, decreasing the interest rate in an economy is likely to increase investment expenditure, potentially boost consumption expenditure, and may have a mixed impact on total savings. It is important for policymakers to consider these various effects when making decisions about monetary policy.
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If the interest rate is decreased in an economy, it willa)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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