Answer to Question #153940 in Economics of Enterprise for asad

Question

How might a reduction in interest rates on credit card borrowing affect the way that people choose to save or spend

Answer 1

A reduction in interest rates on credit card borrowings increase consumers' spending and reduce saving.

Interest rates are a cost of borrowing. As a result, a reduction in interest rate represents a fall in the cost of borrowing money to finance expenditure. Resultantly, consumers' disposable incomes increase, leading to an increase in the marginal propensity to consume (MPC). Thus, spendings increase and savings fall.