Which of the following is likely to cause monetary restraint to be effective?
A)High expectations overwhelm high interest rates.
B)Businesses have the ability to borrow funds from foreign banks.
C)People behave rationally and borrow less when interest rates rise.

Question

Quizplus · Accepted Answer

When interest rates rise, people tend to borrow less as the cost of borrowing increases. This reduces consumer spending and causes monetary restraint to be effective. Option A is incorrect because if expectations are high, people may still continue to borrow and spend even if interest rates are high. Option B is incorrect because if businesses have the ability to borrow funds from foreign banks, then monetary restraint may not be as effective as the economy can still potentially be stimulated by foreign borrowing.

Which of the Following Is Likely to Cause Monetary Restraint