Question

How do low savings result in lack of capital formation?

• A. Low savings among people encourage the government to formulate financial planning.
• B. With low savings, people spend more on capital goods.
• C. With low savings and low demand, there is less money for industrialists to invest.
• D. With low savings among people, the government witness shortage of capital for new investments.

Answer 1

The correct option is C With low savings and low demand, there is less money for industrialists to invest.

In case of widespread poverty, people earn less and thus spend and save less. Low savings along with lower demand result in less capital for industrialists for investing in their businesses. Thus, it leads to lack of capital formation.