Sequence the situations that take place in the economy when the financial institutions increase the interest rate.
production cost
increases
demand for finished
good decreases
business shies away
from borrowing from
the bank
price of finished
goods increases
consumer spending
goes down
The sequence is: 1. business shies away from borrowing from the bank; 2. production cost increases; 3. Price of finished goods increase; 4. consumer spending goes down; 5. demand for finished goods decreases.
Explanation:
One of the first fundamental effects of a rise in the interest rate is that it increases the cost of borrowing. This makes interest payments on credit cards and loans higher. This discourages people from borrowing money or spending on finished goods. The people who have already borrowed will have less to spend because their payments increased. Consumption levels will also fall and people with mortgages will also pay more interest. There are more incentives to save money than to spend money with a rise in interest rates.
