Question

UPSC Prelims 2014 Question:

If the interest rate is decreased in an economy, it will

1. decrease the consumption expenditure in the economy
2. increase the tax collection of the Government
3. increase the investment expenditure in the economy
4. increase the total savings in the economy

Answer (Detailed Solution Below)

Option 3: increase the investment expenditure in the economy

Detailed Solution

Explanation:

Higher interest rates mean higher borrowing costs, and people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall.
Decrease in interest rate will increase the liquidity and money supply in an economy, thus increasing the investment expenditure in the economy. Banks often have more leverage to lend money to citizens and businessmen with low-interest rates.

Therefore, option (3) is the correct answer.

Subject: Economics | Money and Banking

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