Question

Suppose that people in France decide to permanently increase their savings rate.Predict what will happen to the French bond market in the future. Can France expect higher or lower domestic interest​ rates?

A.There will be an increase in​ wealth, creating a shift to the right in the demand curve for bonds in France. France can therefore expect permanent higher interest rates in the future.
B.There will be a decrease in​ wealth, creating a shift to the left in the demand curve for bonds in France. France can therefore expect permanent lower interest rates in the future.
C.There will be an increase in​ wealth, creating a shift to the right in the demand curve for bonds in France. France can therefore expect permanent lower interest rates in the future.
D.There will be a decrease in​ wealth, creating a shift to the left in the demand curve for bonds in France. France can therefore expect permanent higher interest rates in the future.

Answer 1

The answer is: C) There will be an increase in​ wealth, creating a shift to the right in the demand curve for bonds in France. France can therefore expect permanent lower interest rates in the future.

Step-by-step explanation:

When the residents of a nation decide to permanently increase their savings, that affects the economy in several ways. At first, it will lower the total demand for products and services (to be able to save money you must spend less) and increase the quantity demanded for bonds. This increase will lower the price (in this case interest rate) of bonds.

When the interest rates of bonds is lower, it means the cost of borrowing money for the general population will also lower. The interest rate commercial banks charge their clients always follow the interest rate of bonds. That will lead to greater investment and spending in the economy, and future economic growth.