Answer to Question #141476 in Economics of Enterprise for frank

Question

Discuss whether or not a rise in the rate of interest will reduce economic growth

Answer 1

A rise in interest rate will reduce economic growth;

When the interest rate rises, the cost of financing debt increases along with the budget deficit, leading to slow economic growth.

A high-interest rate will increase the value of money, which will lead to slow economic growth.

The rise in interest rate will make people increase saving rate hence leading to slow economic growth.

The rise in interest will lead to an increase in borrowing costs, which can discourage customers from borrowing. People with existing loans might have less disposable income, which will make them pay more in interest cost; hence will lead to slow economic growth.

 A rise in interest rate will only decrease economic growth but not increasing economic growth unless we reduce the interest rate.