Which of the following would be most likely to lead to a higher level of interest rates in the economy?
Answer a. Corporations step up their expansion plans and thus increase their demand for capital.
b. Households start saving a larger percentage of their income.
c. The economy moves from a boom to a recession.
d. The level of inflation begins to decline.
To determine which of the given options would most likely lead to a higher level of interest rates in the economy, let's analyze each option:
a. Corporations step up their expansion plans and thus increase their demand for capital:
When corporations increase their expansion plans and require more capital, they generally borrow more money from banks or issue bonds. This increased demand for capital typically leads to higher interest rates as lenders charge higher rates to meet the increased demand.
b. Households start saving a larger percentage of their income:
If households save a larger percentage of their income, it usually reduces the amount of money available for borrowing. When the supply of money available for loans decreases, lenders may increase interest rates to compensate for the reduced supply.
c. The economy moves from a boom to a recession:
During a recession, economic activity slows down, and businesses and individuals tighten their spending. In such conditions, the demand for loans tends to decrease. When there is less demand for loans, interest rates may decrease rather than increase.
d. The level of inflation begins to decline:
When inflation declines, it generally indicates that the overall price levels in the economy are falling. In response to lower inflation, central banks may lower interest rates to stimulate economic activity and encourage borrowing.
Based on the explanations above, the option most likely to lead to a higher level of interest rates in the economy is:
a. Corporations step up their expansion plans and thus increase their demand for capital.