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Raising the interest rates causes contraction in money supply. Consider the given statements:
(a) It encourages saving.
(b) It discourages borrowing.
(c) It has no effect.
(b) It discourages borrowing.
(c) It has no effect.
Which of the above mentioned statements is/are incorrect?
- a)(a) only
- b)(b) only
- c)(c) only
- d)(a) and (b) only
- e)None of these
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Raising the interest rates causes contraction in money supply. Conside...
Raising the interest rates tends to encourage saving because people get better returns on their deposits. On the other hand, raising interest rates on loans acts as a dampening factor. Both of these are conducive to reduction in money supply. When interest rates will be higher people will borrow less. So, it will It discourage borrowing.
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Raising the interest rates causes contraction in money supply. Conside...
Raising Interest Rates and Money Supply
Introduction:
Raising interest rates is one of the tools used by central banks to control the money supply and manage economic stability. When interest rates are increased, it affects various aspects of the economy, including saving and borrowing behaviors. Let's analyze each statement and determine whether it is correct or incorrect.
(a) It encourages saving:
Raising interest rates generally encourages saving for the following reasons:
- Higher returns: When interest rates increase, savings accounts, fixed deposits, and other interest-bearing instruments provide higher returns to savers. This makes saving more attractive as individuals can earn more on their savings.
- Opportunity cost: Higher interest rates increase the opportunity cost of spending money in the present. Individuals may choose to save more instead of spending on immediate consumption, considering the higher returns they can earn.
(b) It discourages borrowing:
Raising interest rates also tends to discourage borrowing due to the following factors:
- Higher cost of borrowing: When interest rates rise, the cost of borrowing increases. This makes loans, mortgages, and other credit facilities more expensive for borrowers. As a result, individuals and businesses may be deterred from taking on additional debt.
- Reduced affordability: With higher interest rates, monthly loan repayments increase. This reduces the affordability of borrowing, particularly for those with variable-rate loans. As a result, borrowing activity may decline.
(c) It has no effect:
This statement is incorrect. Raising interest rates does have an effect on the economy, particularly on saving and borrowing behaviors. As discussed above, it encourages saving and discourages borrowing, which are mechanisms through which money supply can be contracted.
Conclusion:
In conclusion, both statements (a) and (b) are correct, while statement (c) is incorrect. Raising interest rates has a significant impact on the money supply as it influences saving and borrowing behaviors.
Introduction:
Raising interest rates is one of the tools used by central banks to control the money supply and manage economic stability. When interest rates are increased, it affects various aspects of the economy, including saving and borrowing behaviors. Let's analyze each statement and determine whether it is correct or incorrect.
(a) It encourages saving:
Raising interest rates generally encourages saving for the following reasons:
- Higher returns: When interest rates increase, savings accounts, fixed deposits, and other interest-bearing instruments provide higher returns to savers. This makes saving more attractive as individuals can earn more on their savings.
- Opportunity cost: Higher interest rates increase the opportunity cost of spending money in the present. Individuals may choose to save more instead of spending on immediate consumption, considering the higher returns they can earn.
(b) It discourages borrowing:
Raising interest rates also tends to discourage borrowing due to the following factors:
- Higher cost of borrowing: When interest rates rise, the cost of borrowing increases. This makes loans, mortgages, and other credit facilities more expensive for borrowers. As a result, individuals and businesses may be deterred from taking on additional debt.
- Reduced affordability: With higher interest rates, monthly loan repayments increase. This reduces the affordability of borrowing, particularly for those with variable-rate loans. As a result, borrowing activity may decline.
(c) It has no effect:
This statement is incorrect. Raising interest rates does have an effect on the economy, particularly on saving and borrowing behaviors. As discussed above, it encourages saving and discourages borrowing, which are mechanisms through which money supply can be contracted.
Conclusion:
In conclusion, both statements (a) and (b) are correct, while statement (c) is incorrect. Raising interest rates has a significant impact on the money supply as it influences saving and borrowing behaviors.
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Raising the interest rates causes contraction in money supply. Consider the given statements:(a) It encourages saving.(b) It discourages borrowing.(c) It has no effect.Which of the above mentioned statements is/are incorrect?a)(a) onlyb)(b) onlyc)(c) onlyd)(a) and (b) onlye)None of theseCorrect answer is option 'C'. Can you explain this answer? for Banking Exams 2025 is part of Banking Exams preparation. The Question and answers have been prepared according to the Banking Exams exam syllabus. Information about Raising the interest rates causes contraction in money supply. Consider the given statements:(a) It encourages saving.(b) It discourages borrowing.(c) It has no effect.Which of the above mentioned statements is/are incorrect?a)(a) onlyb)(b) onlyc)(c) onlyd)(a) and (b) onlye)None of theseCorrect answer is option 'C'. Can you explain this answer? covers all topics & solutions for Banking Exams 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Raising the interest rates causes contraction in money supply. Consider the given statements:(a) It encourages saving.(b) It discourages borrowing.(c) It has no effect.Which of the above mentioned statements is/are incorrect?a)(a) onlyb)(b) onlyc)(c) onlyd)(a) and (b) onlye)None of theseCorrect answer is option 'C'. Can you explain this answer?.
Raising the interest rates causes contraction in money supply. Consider the given statements:(a) It encourages saving.(b) It discourages borrowing.(c) It has no effect.Which of the above mentioned statements is/are incorrect?a)(a) onlyb)(b) onlyc)(c) onlyd)(a) and (b) onlye)None of theseCorrect answer is option 'C'. Can you explain this answer? for Banking Exams 2025 is part of Banking Exams preparation. The Question and answers have been prepared according to the Banking Exams exam syllabus. Information about Raising the interest rates causes contraction in money supply. Consider the given statements:(a) It encourages saving.(b) It discourages borrowing.(c) It has no effect.Which of the above mentioned statements is/are incorrect?a)(a) onlyb)(b) onlyc)(c) onlyd)(a) and (b) onlye)None of theseCorrect answer is option 'C'. Can you explain this answer? covers all topics & solutions for Banking Exams 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Raising the interest rates causes contraction in money supply. Consider the given statements:(a) It encourages saving.(b) It discourages borrowing.(c) It has no effect.Which of the above mentioned statements is/are incorrect?a)(a) onlyb)(b) onlyc)(c) onlyd)(a) and (b) onlye)None of theseCorrect answer is option 'C'. Can you explain this answer?.
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