ACCA FM · Chapter 2 · Question 2 of 10
A government raises interest rates in order to reduce inflation. Which of the following is the MOST likely consequence for a company based in that country?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) An increase in its cost of borrowing and a fall in demand for its products
Explanation
Higher interest rates increase the cost of variable rate and new borrowing and discourage consumer spending financed by credit, so demand for many products falls. Higher interest rates also tend to attract foreign capital, which strengthens rather than weakens the domestic currency, making exports more expensive.
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