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UPSC Exam  >  UPSC Questions  >   If the rate of interest is reduced in an eco... Start Learning for Free
If the rate of interest is reduced in an economy, it will -
  • a)
    Consumption expenditure in the economy will decrease
  • b)
    increase government tax collection
  • c)
    Investment in the economy will increase expenditure
  • d)
    increase total savings in the economy
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
If the rate of interest is reduced in an economy, it will -a)Consumpt...
If the interest rate is reduced in an economy, it will increase consumption expenditure and investment in the economy. Also, the low-interest rate makes it easy to borrow which increases the liquidity in the economy. A low-interest rate keeps the Aggregate Demand and economic growth likely to remain high, but growth in aggregate demand may also be due to high inflationary pressures.
Hence, the correct option is (C)
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In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Whenever there is a decline in the proportion of consumption expenditure on cereals

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If the rate of interest is reduced in an economy, it will -a)Consumption expenditure in the economy will decreaseb)increase government tax collectionc)Investment in the economy will increase expenditured)increase total savings in the economyCorrect answer is option 'C'. Can you explain this answer?
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