ECONOMICS
BUSINESS CYCLES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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a high interest rate may lead to a contraction
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a low interest rate should lead to growth
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money is expensive when interest rates are high
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money is cheap when interest rates are low.
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Detailed explanation-1: -The interest rate cycle is closely related to the economic or trade cycle. In theory, movements in interest rates should mirror the economic cycle. If the economy is growing strongly and inflationary pressures increasing – Central Banks will increase interest rates to slow down the economy and prevent inflation.
Detailed explanation-2: -When interest rates are high, it’s more expensive to borrow money; when interest rates are low, it’s less expensive to borrow money.
Detailed explanation-3: -A fall in interest rates increases the amount of money people wish to hold, while a rise in interest rates decreases that amount. A change in prices is another way to make the money supply equal the amount demanded.
Detailed explanation-4: -Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing. This creates a situation where output and productivity increase.