Higher interest rates curb spending to reduce inflation

Steps:

• Higher interest rates make borrowing costlier, discouraging loans for big purchases.
• Reduced borrowing leads to less consumer spending on goods and services.
• Lower spending decreases demand in the economy.
• With demand falling, prices rise more slowly, lowering inflation.

Why A is correct:

• High interest rates increase returns on savings, encouraging consumers to save rather than spend, which reduces aggregate demand and inflationary pressure per the quantity theory of money (MV = PQ).

Why the others are wrong:

• B: High rates make spending less attractive due to costlier credit, not more.
• C: High rates deter borrowing as loans become expensive for producers.
• D: High rates raise investment costs, making producers less willing to invest.

Final answer: A