ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If GDP falls, then people demand less money for transactions. The interest one gives up is the opportunity cost of holding money. As interest rates rise (fall), the demand for money will fall (rise).

Detailed explanation-2: -Potential borrowers become more hesitant to borrow money because of the higher cost. People buy less, reducing demand for products and potentially reducing inflation. Banks often tighten credit standards when they increase rates, further reducing the number of loans they make.

Detailed explanation-3: -If demand falls, companies make less money. If investors anticipate that companies will make less money, the price of assets, such as stocks and bonds, drops. People who hold these assets would therefore feel less wealthy and may be less likely to borrow and spend. This can lead to lower inflation.

Detailed explanation-4: -When interest rates are high, it’s more expensive to borrow money; when interest rates are low, it’s less expensive to borrow money. Before you agree to a loan, it’s important to make sure you completely understand how the interest rate will affect the total amount you owe.

Detailed explanation-5: -Interest rate impacts on stocks When the Fed raises interest rates, banks increase their rates for consumer and business loans. In theory, this means there’s less money available for consumer spending.