When the Reserve Bank of Australia raises the cash rate, this normally leads to:

Question

Quizplus · Accepted Answer

When the Reserve Bank of Australia raises the cash rate, it leads to an increase in other interest rates in the economy. This, in turn, makes borrowing more expensive, leading to a decrease in investment spending by businesses and households. Higher interest rates also decrease the disposable income of consumers, leading to a decrease in consumption spending, as reflected in choice B. Therefore, the best choice is D, which states that other interest rates rising reduce investment spending. Choice A is incorrect because higher interest rates do not stimulate consumption spending but some consumers might increase borrowing before the interest rates increase to avoid the higher rates. Choice C is also incorrect because rising interest rates tend to decrease investment spending.

When the Reserve Bank of Australia Raises the Cash Rate