How do lower interest rates typically affect consumer spending?

How do lower interest rates typically affect consumer spending?

• A. They discourage borrowing
• B. They have no significant effect
• C. They encourage borrowing and spending
• D. They reduce disposable income

Answer: (C)

Lower interest rates typically encourage borrowing and spending by making loans more affordable. When interest rates are lower, the cost of borrowing decreases, which can lead to increased consumer confidence in taking out loans for big-ticket items such as homes, cars, and other purchases. Additionally, lower rates reduce monthly repayment amounts, allowing consumers to allocate more of their income toward consumption rather than interest payments. As borrowing becomes less expensive, consumers are more likely to finance purchases on credit, stimulating economic activity. Increased consumer spending can drive demand for goods and services, which can, in turn, contribute to economic growth. Thus, lower interest rates create a favorable environment for consumer expenditure, enhancing overall economic welfare.

Lower interest rates typically encourage borrowing and spending by making loans more affordable. When interest rates are lower, the cost of borrowing decreases, which can lead to increased consumer confidence in taking out loans for big-ticket items such as homes, cars, and other purchases. Additionally, lower rates reduce monthly repayment amounts, allowing consumers to allocate more of their income toward consumption rather than interest payments.

As borrowing becomes less expensive, consumers are more likely to finance purchases on credit, stimulating economic activity. Increased consumer spending can drive demand for goods and services, which can, in turn, contribute to economic growth. Thus, lower interest rates create a favorable environment for consumer expenditure, enhancing overall economic welfare.