Question

Why might consumers have a reduction in disposable income when interest rates increase?

Answer 1

Disposable income is the income which is available for consumers to spend on goods and services.

When the interest rate increases, consumers tend to save money in banks etc by curtailing their spendings because of the luring interest on savings. This reduces their disposable income. The extent of investment and therefore reduction in disposable income depends upon the level of interest rate that is increased.

Any country's central bank influences the inflation, deflation, recession, unemployment by changing the interest rates.

This is a natural behaviour of people to maximise their wealth by reacting to the favourable/unfavorable situations.