As a way for the banking system to try to stimulate growth, would you: A. Reduce interest rates on loans to urban firms? B. Reduce interest rates on loans to rural firms? C. Or Not do anything?

Answer

A. Reduce interest rates on loans to urban firms?

Explanation

The best way the banking system can stimulate growth is by reducing interest rates on loans. The growth of any economy is highly dependent upon the aggregate demand and the investment level, both of which are directly influenced by the interest rates. With low interest rates, the urban firms increase their investment to increase the number of available employment opportunities. As employment opportunities increase, there is an increase in household income, which also increases tax revenue stimulating economic growth.