Photo AI
Raising interest rates before the end of the decade could threaten the long sought-after economic recovery in the Eurozone, the OECD has warned - Leaving Cert Economics - Question 2 - 2018
Question 2
Raising interest rates before the end of the decade could threaten the long sought-after economic recovery in the Eurozone, the OECD has warned. Outline two possibl... show full transcript
Worked Solution & Example Answer:Raising interest rates before the end of the decade could threaten the long sought-after economic recovery in the Eurozone, the OECD has warned - Leaving Cert Economics - Question 2 - 2018
Step 1
(i) Outline an economic effect related to consumer borrowing.
Answer
An increase in interest rates discourages or disincentivizes consumers from borrowing. Higher interest rates make loans more expensive, which can lead to decreased consumer confidence. As a result, households may postpone or reduce their spending on goods and services, ultimately leading to a decline in consumption levels in the economy.
Step 2
(ii) Outline an economic effect related to government finances.
Answer
With rising interest rates, the cost of servicing national debt increases. This situation can lead to reduced tax revenues for the government, as higher interest payments may limit the funds available for public services and investments. Consequently, the government may see a drop in its ability to finance programs, potentially leading to cutbacks in public spending and negative implications for economic growth.