Question

Why do interest rates on loans tend to be lower in a weak economy than in a strong one?
a.
A weak economy tends to have low inflation, so interest rates drop to match.
b.
Borrowers in a weak economy are less likely to default on their loans, so interest rates are correspondingly low.
c.
In a weak economy there is less demand for credit, so the price drops.
d.
The strength or weakness of an economy is determined by interest rates; low interest rates actually cause a weak economy.

Answer 1

c.

In a weak economy businesses and consumers borrow less (fewer profitable investment projects, lower spending), so demand for credit falls and the "price" of borrowing (interest rates) tends to fall. (Related effects: central banks often cut policy rates and inflation tends to be lower in weak economies, which also pushes nominal rates down; choices b and d are incorrect.)