UPSC Exam > UPSC Questions > Consider the following statements: Interest r...
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Consider the following statements:
- Interest rates rise when inflation decreases.
- Lower interest rates typically encourage saving and discourage borrowing.
- Central banks adjust interest rates to regulate the money supply and stabilize economic activity.
- Rising interest rates have a stimulative effect on the housing market.
How many of the above statements about interest rates are correct?
- a)Only one
- b)Only two
- c)Only three
- d)All four
Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Consider the following statements: Interest rates rise when inflation ...
- S1 is incorrect: Interest rates generally rise with increasing inflation to compensate lenders for the diminishing value of money over time.
- S2 is incorrect: Lower interest rates typically encourage borrowing and spending by making it cheaper to finance purchases, while they discourage saving by offering lower returns on savings accounts and investments.
- S3 is correct. Central banks, such as the Federal Reserve in the United States, use monetary policy tools, including adjusting interest rates, to influence the money supply in the economy. By raising or lowering interest rates, central banks can influence borrowing, spending, and investment, which in turn affects economic activity and inflation.
- S4 is incorrect: Rising interest rates usually have a dampening effect on the housing market as higher mortgage rates make it more expensive for individuals to borrow money for home purchases, potentially reducing demand for homes and slowing down housing market activity.
Most Upvoted Answer
Consider the following statements: Interest rates rise when inflation ...
Interest Rates: Correct Statements
Interest rates play a crucial role in the functioning of an economy, impacting various aspects such as inflation, savings, borrowing, money supply, economic activity, and the housing market. Let's analyze the statements provided:
1. Interest rates rise when inflation decreases:
- This statement is incorrect. In reality, interest rates tend to rise when inflation increases. Central banks often raise interest rates to combat high inflation by reducing the money supply and curbing spending.
2. Lower interest rates typically encourage saving and discourage borrowing:
- This statement is correct. When interest rates are low, saving becomes less rewarding due to lower returns. On the other hand, borrowing becomes more attractive as the cost of borrowing decreases, stimulating economic activity.
3. Central banks adjust interest rates to regulate the money supply and stabilize economic activity:
- This statement is correct. Central banks use interest rates as a tool to control the money supply in the economy. By raising or lowering interest rates, they can influence borrowing, spending, and investment, thereby stabilizing economic activity.
4. Rising interest rates have a stimulative effect on the housing market:
- This statement is incorrect. Rising interest rates usually have a dampening effect on the housing market. Higher interest rates lead to increased mortgage costs, making it more expensive for individuals to buy homes. This can slow down the demand for housing and impact the overall housing market.
Therefore, out of the four statements provided, only the second statement about lower interest rates encouraging saving and discouraging borrowing is correct. It is important to understand the relationship between interest rates and various economic factors to make informed decisions and predictions about the economy.
Interest rates play a crucial role in the functioning of an economy, impacting various aspects such as inflation, savings, borrowing, money supply, economic activity, and the housing market. Let's analyze the statements provided:
1. Interest rates rise when inflation decreases:
- This statement is incorrect. In reality, interest rates tend to rise when inflation increases. Central banks often raise interest rates to combat high inflation by reducing the money supply and curbing spending.
2. Lower interest rates typically encourage saving and discourage borrowing:
- This statement is correct. When interest rates are low, saving becomes less rewarding due to lower returns. On the other hand, borrowing becomes more attractive as the cost of borrowing decreases, stimulating economic activity.
3. Central banks adjust interest rates to regulate the money supply and stabilize economic activity:
- This statement is correct. Central banks use interest rates as a tool to control the money supply in the economy. By raising or lowering interest rates, they can influence borrowing, spending, and investment, thereby stabilizing economic activity.
4. Rising interest rates have a stimulative effect on the housing market:
- This statement is incorrect. Rising interest rates usually have a dampening effect on the housing market. Higher interest rates lead to increased mortgage costs, making it more expensive for individuals to buy homes. This can slow down the demand for housing and impact the overall housing market.
Therefore, out of the four statements provided, only the second statement about lower interest rates encouraging saving and discouraging borrowing is correct. It is important to understand the relationship between interest rates and various economic factors to make informed decisions and predictions about the economy.
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Consider the following statements: Interest rates rise when inflation decreases. Lower interest rates typically encourage saving and discourage borrowing. Central banks adjust interest rates to regulate the money supply and stabilize economic activity. Rising interest rates have a stimulative effect on the housing market.How many of the above statements about interest rates are correct?a)Only oneb)Only twoc)Only threed)All fourCorrect answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements: Interest rates rise when inflation decreases. Lower interest rates typically encourage saving and discourage borrowing. Central banks adjust interest rates to regulate the money supply and stabilize economic activity. Rising interest rates have a stimulative effect on the housing market.How many of the above statements about interest rates are correct?a)Only oneb)Only twoc)Only threed)All fourCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements: Interest rates rise when inflation decreases. Lower interest rates typically encourage saving and discourage borrowing. Central banks adjust interest rates to regulate the money supply and stabilize economic activity. Rising interest rates have a stimulative effect on the housing market.How many of the above statements about interest rates are correct?a)Only oneb)Only twoc)Only threed)All fourCorrect answer is option 'A'. Can you explain this answer?.
Consider the following statements: Interest rates rise when inflation decreases. Lower interest rates typically encourage saving and discourage borrowing. Central banks adjust interest rates to regulate the money supply and stabilize economic activity. Rising interest rates have a stimulative effect on the housing market.How many of the above statements about interest rates are correct?a)Only oneb)Only twoc)Only threed)All fourCorrect answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements: Interest rates rise when inflation decreases. Lower interest rates typically encourage saving and discourage borrowing. Central banks adjust interest rates to regulate the money supply and stabilize economic activity. Rising interest rates have a stimulative effect on the housing market.How many of the above statements about interest rates are correct?a)Only oneb)Only twoc)Only threed)All fourCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements: Interest rates rise when inflation decreases. Lower interest rates typically encourage saving and discourage borrowing. Central banks adjust interest rates to regulate the money supply and stabilize economic activity. Rising interest rates have a stimulative effect on the housing market.How many of the above statements about interest rates are correct?a)Only oneb)Only twoc)Only threed)All fourCorrect answer is option 'A'. Can you explain this answer?.
Solutions for Consider the following statements: Interest rates rise when inflation decreases. Lower interest rates typically encourage saving and discourage borrowing. Central banks adjust interest rates to regulate the money supply and stabilize economic activity. Rising interest rates have a stimulative effect on the housing market.How many of the above statements about interest rates are correct?a)Only oneb)Only twoc)Only threed)All fourCorrect answer is option 'A'. Can you explain this answer? in English & in Hindi are available as part of our courses for UPSC.
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