When an economy is in a recession,
A)strong demand for investment funds will push interest rates upward.
B)strong demand for resources will push the prices of resources upward.
C)weak demand for investment funds will cause the real interest rate to decline.
D)the unemployment rate will be less than its natural rate.

Question

Quizplus · Accepted Answer

In a recession, there is weak demand for investment funds as businesses and consumers are not as willing to invest or spend money. This weak demand for investment funds causes the real interest rate (after accounting for inflation) to decline, as lenders compete to find borrowers willing to take out loans. The other choices are less likely to occur during a recession, as strong demand for investment funds and resources typically come during times of economic growth and expansion, and the unemployment rate is higher during a recession compared to its natural rate.

When an Economy Is in a Recession