Question

The economy starts to improve, increasing household incomes. This increases savings rates as well as borrowing rates (because consumers are better able to repair their loans).  This can result in (check all that apply):

Interest rates moving higher.

Interest rates moving lower.

Interest rates becoming increasingly volatile.

Interest rates staying the same.

Answer 1

As mentioned due to the improvement of the economy the household incomes have increased. Which means the money in the hand of the public is growing which leads to an increase in inflation. So to regulate the inflation in the economy the excess money has to be suck through changing the interest rate or monetary policy.

With an increase in the savings rate, the deposit will increase in banks which implies the money is being sucked which will reduce the purchasing capacity i.e. inflation is brought under control.

So to increase the savings rate the monetary policy has to be altered by increasing the interest rates.

This will result in interest rates moving higher. So the answer will be the first option provided in the questuon.