Question

Why do interest rates on loans tend to be higher in a strong economy than in a weak one?
a.
Credit markets increase in a strong economy, and with increased demand come increased prices.
b.
A strong economy encourages borrowers to take out very long-term loans, which have higher interest rates.
c.
Credit is plentiful in a strong economy, so it is harder to build up the good credit rating necessary for a low interest rate.
d.
People in a strong economy have more money, so they can afford more expensive loans.

Answer 1

a.

In a strong economy demand for credit rises (business expansion, consumer borrowing), which pushes up the price of credit — the interest rate. Central banks also often raise policy rates in a strong economy to curb inflation, which raises loan rates further.