Question

During a financial crisis in the early 2000s, the government of Argentina partially froze bank accounts for a year. Given the supply of saving and the demand to borrow functions, we would expect this action to cause the interest rate to:

A. decrease and borrowing to decrease.
B. decrease and borrowing to increase
C. increase and borrowing to decrease
D. increase and borrowing to increase.

Answer 1

C

Step-by-step explanation:

Given the supply of saving and the demand to borrow functions, we would expect interest rate to increase and borrowing to decrease.

As interest rate increases the cost of borrowing increases and is more expensive. At lower interest rates, the cost of investing decreases and the funds that are demanded for investment would increase. This government action cause a poor macroeconomic environment in Argentina. This would cause output in Argentina to fall, and a rise in unemployment. Income poverty will grow in Argentina.