Answer:
Of the following situations, the one that does NOT usually cause an increased interest rate is:
2. When people are saving more and borrowing less.
Explanation:
An interest rate can be defined as the cost of borrowing money. From the lenders perspective, it can be defined as the risk of lending money or the lenders compensation for monetary services offered. The amount of interest rates charged by banks in an economy usually varies with the various forces in that market. For the lenders and borrowers, it is important to know these forces that drive the cost of credit.
When the lender gives money to a borrower, they risk they risk not being paid back. The lender also carries the risk of factors such as inflation that reduces the purchasing power of money. To account for this risk, the lender usually adjusts their interest rates accordingly to cover their risk.
Borrowers on the other hand, have to pay an interest for being provided with the ability to spend. This can be defined in simple terms as the cost of borrowing. In the literal sense, consider someone who needs money at this moment but they don't have enough of it. Banks can provide a loan to this individual at that moment as opposed to saving the money for years.
The following factors lead to increased interest rates;
1. Political uncertainty: uncertainty discourages both domestic and foreign investment making the currency value to decline. Banks thus increase their interest rates.
2. Inflation: increased inflation leads to an increased prices, due to increased demand for goods and services. Banks tend to increase their interest rates since the demand for money is also high.
3. When people are saving less and borrowing more: this means that the demand for money is high, thus banks increase interest rates since they are risking more money by lending more.
