What is an effect of increasing interest rates?

Increasing interest rates have the effect of curbing spending for several reasons. When interest rates rise, the cost of borrowing becomes more expensive. This includes loans for things like homes, cars, and business expansions. As loans and credit become pricier, consumers and businesses are likely to borrow less. Consequently, they may cut back on expenditure since financing purchases through credit is less attractive.

Additionally, higher interest rates can lead to a decrease in disposable income. If consumers have loans with variable interest rates, their monthly payments could increase, leaving them with less money to spend on goods and services. Similarly, businesses may delay or reduce investment plans due to the higher cost of financing, which further contributes to lower overall spending in the economy.

This curbing effect can slow down economic growth and reduce inflationary pressures, as consumers and businesses being more cautious leads to weaker demand in the market. Therefore, the choice highlighting the curbing of spending accurately reflects one of the fundamental economic consequences of increasing interest rates.