Policies to promote growth by increasing savings and investment work through: a. increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. b. decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. c. increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital. d. increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
Question
Policies to promote growth by increasing savings and investment work through:
a. increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
b. decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
c. increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital.
d. increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
Solution
The correct answer is:
a. increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
Policies that promote growth by increasing savings and investment work by increasing the supply of loanable funds. When the supply of loanable funds increases, the interest rate decreases. A lower interest rate makes borrowing cheaper, which encourages firms to borrow more to invest in physical capital. This increased investment in physical capital can lead to economic growth.
Options b, c, and d are incorrect because they either suggest that the supply of loanable funds decreases or the interest rate increases, both of which would discourage investment in physical capital, not encourage it.
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