Answer:
2 & 3
Step-by-step explanation:
2. High Interest Rates
High-interest rates make it more difficult for businesses to invest. For instance, a small store that is just starting is going to find it hard to make repayments at an interest rate of 20 or 30 percent. It also sucks out money from the economy and re-directs it to the banks. As the interest rates are so high, businesses and consumers reduce their demand for credit. In turn, there is a contraction in the money supply which can lead to deflation.
The effects of high interest rates can be dire if not managed correctly and subtly by central banks. If the interest rates are increased too fast, too high, and too rapidly, we will see the aforementioned effects such as lower business investment and deflation. Therefore, it can contribute to a transition towards an economic contraction in the business cycle.
3. Declining Real Incomes
Inflation can create a drain on consumer incomes as it decreases its value year on year. Therefore, if firms do not increase wages in line with inflation, the average worker will be able to afford less than before.
If real incomes decline, it means consumers have less income to spend on goods and services in the economy. In turn, a prolonged period of decline in real incomes can contribute to an economic contraction in the business cycle.
