Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases private savings
B
It decreases private savings due to the crowding out effect
C
It has no effect on private savings
D
It shifts savings to foreign investments
Understanding the Answer
Let's break down why this is correct
Answer
When the government borrows more money, it takes funds from the loanable funds market, which is where savers lend their money to borrowers. This increased demand for loans can lead to higher interest rates because there are fewer funds available for private borrowers. As interest rates rise, people may decide to save more money to take advantage of these higher rates, or they might find it more expensive to borrow money for things like homes or cars, leading to less spending. For example, if a family wants to buy a new car but sees that interest rates have increased due to government borrowing, they might delay their purchase and choose to save more instead. Overall, increased government borrowing can change how much people save and spend in the economy.
Detailed Explanation
When the government borrows more money, it takes away funds that could be used for private savings. Other options are incorrect because Some might think that more government borrowing encourages people to save more; It's a common belief that government borrowing has no impact on private savings.
Key Concepts
crowding out effect
savings behavior
Topic
Loanable Funds Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.