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Consider the following statements.
1. Easy availability of credit encourages investment
2. At higher interest rates, firms tend to lower investment
Which of these statements are correct?
- a)1 Only
- b)2 Only
- c)Both of them
- d)None of them
Correct answer is option 'C'. Can you explain this answer?
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Verified Answer
Consider the following statements. 1. Easy availability of credit enc...
- Change in investment: we have assumed that investment is autonomous. However, it just means that it does not depend on income. There are a number of variables other than income which can affect investment. One important factor is availability of credit: easy availability of credit encourages investment.
- Another factor is interest rate: interest rate is the cost of investible funds, and at higher interest rates, firms tend to lower investment.
Most Upvoted Answer
Consider the following statements. 1. Easy availability of credit enc...
Easy availability of credit encourages investment
- When credit is easily available, firms and individuals are more likely to borrow money to invest in various projects and ventures.
- This can lead to an increase in overall investment in the economy, as businesses have the necessary funds to expand operations or undertake new projects.
- Easy access to credit can also stimulate consumer spending, which in turn can drive economic growth and create more opportunities for investment.
At higher interest rates, firms tend to lower investment
- Higher interest rates mean that borrowing money becomes more expensive for firms.
- As a result, firms may be more hesitant to take out loans or issue bonds to finance new projects or expansions.
- This can lead to a decrease in overall investment in the economy, as businesses may prioritize paying off existing debt or saving money rather than taking on new financial obligations.
- Lower levels of investment can have a negative impact on economic growth and job creation.
Conclusion
Both statements are correct because they highlight the relationship between credit availability, interest rates, and investment levels. Easy access to credit can encourage investment, while higher interest rates can deter firms from investing in new projects. It is essential for policymakers to carefully consider these factors when making decisions about monetary policy and financial regulation in order to promote sustainable economic growth.
- When credit is easily available, firms and individuals are more likely to borrow money to invest in various projects and ventures.
- This can lead to an increase in overall investment in the economy, as businesses have the necessary funds to expand operations or undertake new projects.
- Easy access to credit can also stimulate consumer spending, which in turn can drive economic growth and create more opportunities for investment.
At higher interest rates, firms tend to lower investment
- Higher interest rates mean that borrowing money becomes more expensive for firms.
- As a result, firms may be more hesitant to take out loans or issue bonds to finance new projects or expansions.
- This can lead to a decrease in overall investment in the economy, as businesses may prioritize paying off existing debt or saving money rather than taking on new financial obligations.
- Lower levels of investment can have a negative impact on economic growth and job creation.
Conclusion
Both statements are correct because they highlight the relationship between credit availability, interest rates, and investment levels. Easy access to credit can encourage investment, while higher interest rates can deter firms from investing in new projects. It is essential for policymakers to carefully consider these factors when making decisions about monetary policy and financial regulation in order to promote sustainable economic growth.
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Consider the following statements. 1. Easy availability of credit encourages investment2. At higher interest rates, firms tend to lower investmentWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) Both of themd) None of themCorrect answer is option 'C'. Can you explain this answer?
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