If the interest rate is decreased in an economy, it will
decrease the consumption expenditure in the economy
increase the tax collection of the Government
increase the investment expenditure in the economy
increase the total savings in the economy
Answer is Wrong!
Answer is Right!
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.