Identify the correct statement from below. (More than one options may be correct.)When interest rate increases, borrowing decreases.When interest rate increases, borrowing increases.When interest rate decreases, borrowing increases.When interest rate decreases, borrowing decreases.
Question
Identify the correct statement from below. (More than one options may be correct.)When interest rate increases, borrowing decreases.When interest rate increases, borrowing increases.When interest rate decreases, borrowing increases.When interest rate decreases, borrowing decreases.
Solution
The correct statements are:
- When interest rate increases, borrowing decreases.
- When interest rate decreases, borrowing increases.
Explanation:
When the interest rate increases, the cost of borrowing also increases. This means that people and businesses are less likely to take out loans because they will have to pay back more money. Therefore, borrowing decreases.
On the other hand, when the interest rate decreases, the cost of borrowing decreases. This makes loans more attractive because people and businesses will have to pay back less money. Therefore, borrowing increases.
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