Question

why do interest rates increase during times like the great depression and 2008 crisis?
is this false?
if so is it because falling prices make the interest rate higher? aka you get poorer and now it costs more to borrow?
how does this come to be? why doesnt the cost of borrowing decrease alongside with dedlation?

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Answer 1

It is a false statement. When an economy enters recession, it causes an increase in liquidity however the supply of credit falls, thus it is normally expected to cause a rise in the interest rates. However during times like the great depression and 2008 crisis, Fed prefers to reduce the repo rate resulting to a decline in the interest rates that encourages spending and borrowing ultimately resulting in stimulating the economy.

The deflation reduces the spending power of consumers and firms. The fall in prices can discourage spending because purchases are often delayed which causes a fall in interest rate and thus cost of borrowing declines