Which of the following best describes the relationship between interest rates and consumer spending in an economy?

• A. Low interest rates have no effect on consumer spending.
• B. Low interest rates always lead to higher unemployment.
• C. When interest rates are low, consumer spending typically decreases.
• D. When interest rates are low, consumer spending typically increases.

Answer: (D)

Verified step by step guidance

1. Understand the concept of interest rates: Interest rates represent the cost of borrowing money. When interest rates are low, borrowing becomes cheaper for consumers.
2. Analyze how low interest rates affect consumer behavior: With cheaper borrowing costs, consumers are more likely to take loans for big purchases like houses, cars, or other goods, which increases consumer spending.
3. Consider the alternative effects: High interest rates make borrowing more expensive, which tends to reduce consumer spending as people are less willing to take on debt.
4. Recognize the typical relationship: Generally, there is an inverse relationship between interest rates and consumer spending—when interest rates decrease, consumer spending tends to increase.
5. Conclude that the statement 'When interest rates are low, consumer spending typically increases' best describes this relationship because it aligns with economic theory and observed behavior.