Multiple choice

Raising the interest rates causes contraction in money supply. Examine the under noted statements:

(a) It encourages savings. (b) It discourages borrowing. (c) No effect

Which of the above is/are incorrect?

  1. (a) only

  2. (b) only

  3. (c) only

  4. (a) and (b) only

  5. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Raising the interest rates tends to encourage saving because people get better return on their deposits. On the other hand, raising interest rates on loan acts as a dampening factor. Both these are conducive to reduction in money supply.

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