What is the relationship between the business cycle and the prime rate?

Question

Quizplus · Accepted Answer

The prime rate tends to rise during an expansion as demand for loans increases, and fall during a contraction as demand for loans decreases. This relationship is due to the fact that during an expansion, businesses and consumers are generally more confident in the economy and therefore more likely to take out loans, leading to increased demand for borrowing and higher interest rates. Conversely, during a contraction, businesses and consumers may be more cautious and less likely to borrow, leading to decreased demand for borrowing and lower interest rates.

What Is the Relationship Between the Business Cycle and the Prime