Dual Enrollment Macroeconomics Practice Test 2025 – The Complete All-in-One Guide to Master Economics!

Higher interest rates typically decrease borrowing due to higher loan costs. When interest rates rise, the cost of borrowing money increases, as consumers must pay more in interest on loans and credit. This higher cost can deter consumers from taking out new loans for big-ticket items, such as homes and cars, or from using credit cards to make purchases. As borrowing costs rise, individuals may choose to delay purchases or opt for smaller loans, which can slow down consumer spending overall.

In contrast, lower interest rates would generally enable more favorable borrowing conditions, encouraging consumers to take on loans due to reduced costs. The impact of interest rates on borrowing is significant in driving economic activity, as a decrease in consumer borrowing can lead to reduced demand for goods and services, potentially slowing down economic growth.

The other options do not accurately capture this relationship; for instance, the idea that higher rates encourage more borrowing contradicts the economic principle that increased costs typically lead to decreased demand. Additionally, equations that suggest no effect on borrowing rates or that higher rates only affect business loans overlook the broad influence of interest rates across the entire economy, including consumer behavior.