Question

Which of the following would be most likely to lead to a higher level of interest rates in the economy?

A. The federal reserve decides to stimulate the economy.

B. The government significantly reduces their planned expenditure in order reduce the budget deficit.

C. Households starts spending a larger percentage of their income, without saving it.

D. Corporations cut back on their expansion plans.

Answer 1

Answer: C. If there is too much household expenditure and a lack of savings, the government would need to increase interest rates to as an incentive to save more.

Wrong: A. The interest would be reduced in a situation where there the federal reserve decides to stimulate the economy, so as to make people borrow more at lower borrowings rates and save less.

Wrong B. The impact of this is not that significant to interest rates.

Wrong D. If corporations cut back on their expansion plans rates would see a decline in the near future to incentivize companies to borrow more and expand at lower rates to help grow the economy.