GK
BUSINESS ECONOMICS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increases spending
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Decreases spending
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Neither increases or decreases spending
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Both increases and decreases spending
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Detailed explanation-1: -Rising interest rates affects spending because the cost of borrowing money goes up. So, if you have a mortgage, any type of credit card or a loan, you could end up paying more for the money you originally borrowed. This will mean that you inevitably have less money to spend on goods and services.
Detailed explanation-2: -But this is not the end of the story. A rise in interest rates also tends to reduce the net worth of businesses and individuals-the so-called balance sheet channel-making it tougher for them to qualify for loans at any interest rate, thus reducing spending and price pressures.
Detailed explanation-3: -When interest rates decrease, it becomes cheaper for individuals to borrow money, which can encourage them to consume more. In this case, when borrowing money is cheaper, individuals may be more willing to take on debt to finance their consumption.