Normative economic statements are economic policy goals. Efficiency goals are ba

Question

Normative economic statements are economic policy goals. Efficiency goals are based on maximizing the social value of goods produced and producing them at least cost (see page 57). Consider these statements:

                Statement One: "Real interest rates should be kept low to encourage economic investment."

                Statement Two: "Real interest rates should be kept high to encourage saving."

                Statement Three: "The federal government should eliminate regulations on businesses."

For your post either:

Pick one of these statements, start your own thread and briefly give an efficiency argument for or against that position, bolstered with some facts from the chapter. DO NOT give an equity argument.

Example of an efficiency argument: The US government should enact polices such as subsidies to encourage innovation in green technologies. Historically, technological change has driven improvements in standards of living, including the ability to live longer and healthier lives. However, it is becoming increasingly evident that environmental costs of economic progress and population growth are climbing rapidly. Thus, rapid and sustainable growth in the coming decades may only be possible if based on technologies that minimize environmental costs.

Explanation / Answer

Statement One: "Real interest rates should be kept low to encourage economic investment."

Interest rate is the price paid for investment . When a business avails for a loan , it has to pay interest rate on it . If real interest rate is kept at a low level it encourages investors to invest more . This leads to economic growth since higher investment means more production . So the efficiency of the economy rises . But if real interest rate is too low it will discourage savings since households will find the interest rate less attractive to save . So supply of loanable funds fall in this case . So interest rate must be maintained at an equilibrium level .

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