ICAEW BIP · Chapter 10 · Question 2 of 10
The central bank raises interest rates. Which of the following is the most likely effect on businesses?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Businesses with variable-rate borrowing face higher finance costs, and demand for goods bought on credit tends to fall
Explanation
Higher interest rates increase the cost of borrowing, so finance costs rise for businesses with variable-rate debt, and consumers tend to cut spending on credit-financed purchases such as cars and household goods. Higher rates also tend to attract overseas funds, which strengthens rather than weakens the domestic currency.
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