What are the government policies that affect saving and investment? Please explain each of them shortly?

Expert Solution

The Government policies have an impact on level of savings and investment in the economy are as follows:

1. Level of Savings: The savings in the economy are determined by the level of income in the economy. As disposable income of the households increases, the level of household savings will increase in the economy. The level of disposable income in the economy is determined by the level od taxes in the economy. When tax rate in the economy increases, disposable income falls and savings decreases and when tax rate decreases, the level of savings increases. Thus, tax rate set by the government impacts the level of savings in the economy.

2. Level of Investment: The cost of investment capital in the economy has an impact on the level of investment in the economy. This is determined by the rate of interest which is set by the Central bank of the economy. Also, government provides investment tax credits, deduction in taxes if a firm borrows money to purchase capital in the economy. Thus, these policies have an impact on level of investment in the economy.

Rahul Sunny answered 2 years ago

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