What is the relationship between the business cycle and the prime rate?
A) The prime rate rises during a contraction and falls during an expansion.
B) The prime rate rises during an expansion and falls during a contraction.
C) The prime rate rises during an expansion and rises during a contraction.
D) The prime rate initially rises during an expansion and then falls.

Question

Quizplus · Accepted Answer

The prime rate is typically raised during an expansion phase of the business cycle to cool off an overheating economy by increasing the cost of borrowing. Conversely, during a contraction phase, the prime rate is lowered to encourage borrowing and investment to stimulate economic growth.

What Is the Relationship Between the Business Cycle and the Prime