If the interest rate is decreased in an economy, it will
[amp_mcq option1=”decrease the consumption expenditure in the economy” option2=”increase the tax collection of the Government” option3=”increase the investment expenditure in the economy” option4=”increase the total savings in the economy” correct=”option3″]
This question was previously asked in
UPSC IAS – 2014
A) decrease the consumption expenditure: Lower interest rates generally make it cheaper for consumers to borrow for purchases (like vehicles, homes) or to use credit, which tends to *increase* consumption expenditure, not decrease it. Also, lower returns on savings encourage spending.
B) increase the tax collection of the Government: While stimulating economic activity might eventually lead to higher tax collection, this is an indirect and not the most direct or immediate effect of a decreased interest rate.
C) increase the investment expenditure in the economy: Businesses often borrow money to finance investments in capital goods, expansion, research, etc. A lower interest rate reduces the cost of borrowing, making more investment projects financially viable and thus encouraging businesses to increase investment expenditure. This is a primary channel through which monetary policy (via interest rates) affects the economy.
D) increase the total savings in the economy: A lower interest rate means a lower return on savings. This makes saving less attractive relative to spending or investing, potentially leading to a *decrease* in the rate of saving or total savings, not an increase.
– Lower interest rates make borrowing cheaper and saving less attractive.
– Cheaper borrowing stimulates investment by businesses and consumption by households.