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
Show Answer
The correct answer is C.
- Decrease the consumption expenditure: Incorrect. Lower interest rates encourage more borrowing and spending from consumers on homes, cars etc. leading to higher consumption expenditure.
- Increase tax collection: Incorrect. No direct link. Tax collection is dependent more on income growth. With lower rates leading to higher investments and GDP growth, tax collection can increase indirectly.
- Increase investment expenditure: Correct. Lower interest rates mean cheaper capital for businesses. So, businesses are encouraged to borrow more and invest in new projects/factories etc. This increases investment expenditure.
- Increase total savings: Incorrect. People tend to save less as they earn lower returns on savings when rates fall. Money is instead used for consumption or paying back debt.
In summary, lower interest rates directly stimulate higher business investments and capital expenditure as cost of money falls. This attracts investment in new capacities and projects.
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