Question

Identify the policies that a government could engage in that would reduce interest rates.

Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.

a) impose a fee on firms that engage in foreign investment

b) increase social security payments

c) decrease government spending on the military

d) reduce the corporate income tax

e) eliminate an existing subsidy paid to firms that purchase new capital

f) adopt a national sales tax

Answer 1

a) this will restrict foreign investment because now there is an additional fee. Domestic investment will increase and this will increase the rate of interest.

b) this will also increase the rate of interest because people will save less and when National saving decreases, rate of interest increases

c) this will reduce budget deficit and increased public savings which will decrease the rate of interest

d) this will increase corporate income and so the demand for capital and investment. Rate of interest is therefore increased.

e) New capital will not be purchased in the same quantity so investment will fall and interest rate will decrease

f). This will increase public saving and therefore National saving increases and rate of interest decreases

Out of all the cases rate of interest is reduced in c), e) and f)