CAF-7 · Chapter 1 · Question 6 of 15
A central bank decides to significantly increase the base interest rate to combat rising inflation. What is the most likely immediate impact of this decision on businesses within that country?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) The cost of borrowing will increase, leading to a reduction in capital investments
Explanation
An increase in the central bank's base interest rate raises the overall cost of borrowing. This discourages businesses from taking loans for capital investments and discourages consumers from spending on credit.
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