Question

Which statement best describes the effects of low and high interest rates on the economy? Low interest rates encourage consumers to borrow and spend, while high interest rates encourage saving. High interest rates discourage consumers from investing, while low interest rates encourage investment. High interest rates encourage consumers to borrow and spend, while low interest rates encourage saving. Low interest rates encourage consumers to invest, while high interest rates discourage investment.

Answer 1

Answer: Low interest rates encourage consumers to borrow and spend, while high interest rates encourage saving.

When interest rates are lower, people will find it cheaper to borrow and spend. Firms also borrow to invest in expansion plans.

When interest rates are low, the incentive to save is low and so consumers will choose to spend more.

A fall interest rates will increase the demand for real assets, which in turn will increase the prices. This will result in an increase in wealth and spur more consumption.

A fall in interest rates results in a depreciation in the value of the home currency, this results in making exports more competitive and imports cheaper.

Thus lower interest rates in the economy result in an increase in Aggregate Demand.

On the contrary, higher interest rates encourage savings, result in a decrease in investments by businesses, reduce the demand for real assets and causes a fall in the real asset prices, results in an appreciation of the currency and render exports uncompetitive and imports more expensive.

Answer 2

The correct answer is A. Low interest rate encourage consumers to borrow and spend, while high interest rates encourage saving.

Interest rate is termed as the rate which a bank charges to its borrowers.

Nationally a good interest rat for a loan is 3.7%.

Recession and inflation are some effects of interest rate. We get to hear the federal funds rates if the interest rate falls or rises.

If the interest rate becomes high people will start to spend less to avoid the high cost.