When firms invest less because people are saving less,it is called the:
A) wealth effect.
B) international trade effect.
C) interest rate effect.
D) savings effect.
E) investment effect.

Question

Quizplus · Accepted Answer

When people save less, there is more money available for borrowing, which increases the demand for loanable funds and thus increases interest rates. Higher interest rates reduce the incentive for firms to invest, as borrowing becomes more expensive. Therefore, the decrease in investment due to lower savings is known as the interest rate effect.

When Firms Invest Less Because People Are Saving Less,it Is