Interest rates determine buying power. Which of the following is a true statement?

• A. Interest rates have no effect on consumer spending.
• B. Lower interest rates always lead to higher inflation.
• C. Rising interest rates increase the amount of money consumers have to spend.
• D. Higher interest rates generally decrease consumer borrowing and reduce buying power.

Answer: (D)

Verified step by step guidance

1. Understand the relationship between interest rates and consumer behavior: Interest rates represent the cost of borrowing money. When interest rates rise, borrowing becomes more expensive, which tends to reduce consumer borrowing.
2. Analyze how higher interest rates affect consumer spending: Since borrowing is more costly, consumers are less likely to take loans for big purchases, which decreases their overall buying power and spending capacity.
3. Consider the impact of lower interest rates: Lower interest rates reduce the cost of borrowing, encouraging consumers to borrow more and spend more, potentially increasing buying power.
4. Evaluate the statements given in the problem: Identify which statements align with the economic principles of how interest rates influence consumer borrowing and spending.
5. Conclude that the true statement is the one indicating that higher interest rates generally decrease consumer borrowing and reduce buying power, as this matches the standard microeconomic understanding of interest rate effects.