Rather Than Cut Consumption During Any Year to Make a Productive

question 58

Multiple Choice

Rather than cut consumption during any year to make a productive investment, an open-economy nation that chooses to finance investment and preserve consumption during the first year:

• A) is always worse off.
• B) is better off if the return is greater than the rate of interest.
• C) must repay the investment 10 times over because of compounding.
• D) is subject to criticism for policies that favor rich investors.

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Definitions:

Loanable Funds

The total funds available for borrowing in the economy, coming from savings, that are used for investments and consumption.

Interest Rate

The fraction of a loan incurred as interest by the borrower, often depicted as an annual percentage of the outstanding loan amount.

Capital Flight

The rapid movement of large sums of money out of a country, typically to escape economic instability or unfavorable investment conditions.

Domestic Investment

The total capital expenditure within a country's borders on physical assets such as buildings, machinery, and equipment, contributing to the national economy.