The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

Question

Quizplus · Accepted Answer

During a period of business expansion, demand for credit increases, leading to higher real interest rates. Conversely, during a recession, demand for credit decreases, leading to lower real interest rates. Therefore, the real rate of interest does vary with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

The Real Rate of Interest Varies with the Business Cycle