Q: 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
The correct answer is to Option 3.
Impact of decreased Interest in an Economy
- When the interest rates decrease, citizens do not want to keep their currency in banks since they would not get a high return. Hence, Statement 4 is not correct.
- In such times, citizens keep the cash flowing in the economy.
- They either invest in productive things or can spend the money on a day-to-day basis. Hence, Statement 1 is not correct.
- Therefore, the interest rate is decreased in an economy, it will increase the investment expenditure in the economy.
- Decreased interest rates would ensure the availability of capital for investment expenditure. Hence, Statement 3 is correct.
- The relationship between the interest rate and investment Expenditure is also illustrated by the investment curve of the economy.
- The curve has a downward slope, indicating that a drop in interest rate, causes the investment-spending to rise.
- If the interest rate is decreased in an economy, it will decrease the tax collection of the Government. Hence, Statement 2 is not correct.
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