Question

Let's assume that a government approves legislation that encourages its citizens to save more (for example,...

Let's assume that a government approves legislation that encourages its citizens to save more (for example, by passing a consumption tax and eliminating the income tax). Which of the following statements is true?

Keynesian economists do not support this change because Keynesian economists care about the long run and not the short run.

None of the listed choices is correct.

Keynesian economists support this change because additional savings helps to stimulate the economy in the short run.

Classical economists do not support this change because additional savings causes interest rates to increase and hurts businesses.

Classical economists support this change because additional savings frees up funds for investments and helps individuals and businesses in the long run.
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Answer #1

Classical economists tends to support greater saving in the economy as they believe that increase in savings will increase the supply of loanable funds in the economy leading to fall in interest rates which in result will induce businesses to borrow more and invest more leading to greater economic growth in long-run.

So, classical economists will support this change because additional savings frees up funds for investment and help individuals and businesses in the long-run.

Hence, the correct answer is the option (5).

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