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Which from the following is not true when the interest rate in the economy goes up ?
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- Savings increases
- Lending decreases
- Cost of production increases
- Return on capital increases
- Savings increases
Correct Option: D
Interest rates are the main determinant of investment on a macroeconomic scale. The current thought is that if interest rates increase across the board, then investment decreases, causing a fall in national income. However, the Austrian School of Economics sees higher rates as leading to greater investment in order to earn the interest to pay the depositors. Higher rates encourage more saving and thus more investment and thus more jobs to increase production to increase profits. Higher rates also discourage economically unproductive lending such as consumer credit and mortgage lending.
