If the interest rate is decreased in an economy, it will
[UPSC Civil Services Exam – 2014 Prelims]
(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
Answer: (c)
Explanation:
- When interest rates decrease, individuals are less inclined to keep their money in banks as the returns would be lower.
- This leads to an increase in cash flow within the economy.
- Citizens may choose to invest in productive ventures or spend their money on day-to-day expenses.
- As a result, a decrease in interest rates stimulates investment expenditure within the economy.
- This ensures the availability of capital for investment purposes.
- The relationship between interest rates and investment expenditure is depicted by the downward-sloping investment curve, indicating that a decrease in interest rates results in an increase in investment spending. Therefore, Option 3 is the correct choice.
