ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Government spending decreases, GDP decreases
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Government spending increases, GDP increases
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Investment increases, GDP increases
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Investment decreases, GDP decreases
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Detailed explanation-1: -Both price level and real GDP will fall. So, an increase in interest rates will-ceteris paribus-cause real GDP to decrease.
Detailed explanation-2: -Central banks cut interest rates when the economy slows down in order to reinvigorate economic activity and growth. Rates go up when the economy is hot. The goal of cutting rates is to reduce the cost of borrowing so that people and companies are more willing to invest and spend.
Detailed explanation-3: -With an increase in interest rates, businesses with company credit cards and existing loans can have higher interest payments, less disposable income and bigger overheads. In some cases, borrowers may find themselves paying off the interest only, rather than the loan itself.
Detailed explanation-4: -The Costs of Capital Rise A second reason that asset prices will fall when interest rates rise is because the cost of capital increases. This impacts businesses and real estate by cutting into earnings-it can profoundly influence the level of net income reported on the income statement.