2014 GS Paper I, all questions
UPSC Prelims 2014 · GS Paper I
Question 61: Economy and Social Development
If the interest rate is decreased in an economy, it will
adecrease the consumption expenditure in the economy
bincrease the tax collection of the Government
cincrease the investment expenditure in the economy
dincrease the total savings in the economy
AnswerUPSC’s answer is (c).
A fall in the interest rate makes borrowing cheaper, so firms find more projects worth financing and investment expenditure rises. For households, lower rates make borrowing for consumption cheaper and saving less rewarding, so consumption tends to rise and savings tend to fall, the opposite of options (a) and (d). Tax collection is not directly raised by an interest rate cut. So the sure effect is higher investment.
Why each option is right or wrong
- (a) Wrong. Cheaper credit and lower returns on saving tend to increase consumption.
- (b) Wrong. A rate cut does not directly raise tax collection.
- (c) Right. Cheaper borrowing raises investment expenditure.
- (d) Wrong. Lower interest rates reduce the reward for saving.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2014, General Studies Paper I, Series A. The paper on upsc.gov.in.