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Chapter 1: Q.11 (page 66)

When interest rates decrease, how might businesses and consumers change their economic behavior?

Short Answer

Expert verified

The investment and spending will increase with the decrease in interest rate.

Step by step solution

01

Step 1. Introduction

Interest rate is the factor payment of capital used by the borrower. It is paid by the borrower to the lender. Higher the interest rate costly will be the borrowings and vice-versa.

02

Step 2. Explanation

Decrease in interest rate makes the borrowings cheap and increases the demand of loan for investment, this increases the money supply into the economy. Increase in money supply will result into higher production, manufacturing, higher income, higher profit and thus the national income will increase.

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