If the central bank raises its policy interest rate, what is the most likely first effect on spending?
Answer and explanation
Correct answer: B. Borrowing becomes dearer
- Step 1: The policy rate affects the cost of credit. Step 2. Higher rates make loans dearer and saving more attractive. Answer: spending on credit tends to fall. Why not the others: Cheaper credit is the opposite effect and the central bank does not set taxes or wages.
Practise more Economics.
Free questions with an explanation for every one, and full timed VWO / HAVO Centraal Examen (Netherlands) mock tests.