11) Which of the following would encourage economic growth through increases in the capital stock? a....

11) Which of the following would encourage economic growth through increases in the capital stock? a. an increase in household savings b. a change from an income tax to a consumption tax c. a decrease in the government deficit d. all of the above

Solutions

Expert Solution

Since economic growth means an increase in the production of output in the economy compare to previous time period.

The economic growth it is possible through more investment in the capital stock.

When the household saving increases, then loanable fund supply increases and interest rate decreases, so at lower interest rate, the firm will borrow more and invest more.

When there is a change from an income tax to a consumption tax, the consumption decreases due to tax on consumption. Hence people prefer to save more and so the household saving increases, then loanable fund supply increases and interest rate decreases, so at lower interest rate, the firm will borrow more and invest more.

When the government deficit decreases, then the demand for the loanable fund decreases, so the interest rate decreases. So at lower interest rate, the firm will borrow more and invest more.

It means options a, b and c all are correct.

Hence option d is the correct answer.

Rahul Sunny answered 8 months ago

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