Why do interest rates follow the business cycle?
A) Typically, the Fed tightens credit to stimulate the economy, which puts further downward pressure on interest rates.
B) Interest rates tend rise during economic expansion and decline during recessions.
C) During an expansion, there is downward pressure on interest rates as businesses begin to grow and borrow more money.
D) During a recession, the demand for goods and services is lower, businesses borrow more, and as a result the economy slows down and the interest rates decline.

Question

Quizplus · Accepted Answer

During economic expansions, demand for credit increases, causing interest rates to rise. During recessions, demand for credit decreases, causing interest rates to decline. This is due to the inverse relationship between supply and demand of credit. As economic activity and demand for credit increases, the supply of credit decreases, causing interest rates to rise. Conversely, as economic activity and demand for credit decreases, the supply of credit increases, causing interest rates to decline.

Why Do Interest Rates Follow the Business Cycle