ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
The central bank of a country raises its base interest rate to control inflation. Which of the following is the most likely direct effect on businesses and consumers?
Borrowing becomes more expensive, so consumer spending and business investment tend to fall. Higher interest rates raise loan costs and make saving more attractive, which reduces demand and helps control inflation. The higher rate would normally strengthen the currency, not weaken it.
- ABorrowing becomes more expensive, so consumer spending and business investment tend to fallCorrect
- BSaving becomes less attractive, so consumer spending tends to rise
- CGovernment tax revenue is automatically increased through higher tax rates
- DExports become cheaper because the exchange rate usually falls
Explanation
Higher interest rates raise the cost of loans and mortgages and reward saving, so spending and investment tend to fall, reducing demand-led inflation. Saving becomes more attractive, not less. Higher rates usually attract foreign capital and strengthen the currency, making exports dearer rather than cheaper.
Did you get it right without looking?
One question tells you little. A timed set on Macroeconomic factors shows your real accuracy, how long you take and where you lose marks.
More Macroeconomic factors questions
- During a period of unexpected high inflation, which party is most likely to benefit?
- A government wants to stimulate a weak economy by using fiscal policy. Which action is an example of expansionary fiscal policy?
- Which of the following is a standard objective of government macroeconomic policy?
- A country's central bank cuts its base rate sharply. Assuming other factors are unchanged, which effect on the country's currency is most li…
- A government wants to raise the long-term productive capacity of its economy and make markets work more efficiently, without relying on incr…
- Which of the following is a typical macroeconomic objective of a government?