UPSC Prelims 2014 GS Paper I · Q61 of 100 Economy easy

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

  1. (a) decrease the consumption expenditure in the economy
  2. (b) increase the tax collection of the Government
  3. (c) increase the investment expenditure in the economy ✓ UPSC's answer
  4. (d) increase the total savings in the economy

Why the answer is (c)

• A lower interest rate cuts the cost of borrowing, so more investment projects become profitable and firms raise investment expenditure — option (c).

• It also tends to raise consumption (not decrease it, a) and reduce savings (not increase, d) since the reward for saving falls; tax collection (b) is not directly affected.

• Hence option (c).

Why the other options are wrong

(a) decrease the consumption expenditure in the economy
Lower rates raise, not lower, consumption.
(b) increase the tax collection of the Government
Tax collection is not directly affected.
(d) increase the total savings in the economy
Lower rates reduce the incentive to save.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2014, held on 24 August 2014. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

Reading the answer is not the same as getting it right under a clock. Practise this question with UPSC's negative marking, and anything you miss goes into an error notebook until you get it right twice.

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