Interest Rate Effects on Saving and Borrowing

Steps:

• Higher interest rates raise returns on savings accounts, incentivizing individuals to save more.
• Higher interest rates increase the price of loans, raising the cost of borrowing for individuals.
• Central bank policy transmits through the economy, affecting personal financial decisions directly.

Why D is correct:

• Per the substitution effect in economics, higher rates boost saving by increasing opportunity cost of spending; borrowing costs rise as lenders charge more to match elevated rates.

Why the others are wrong:

• A: Saving increases, not decreases, due to higher rewards.
• B: Both saving and borrowing costs rise, not decrease.
• C: Borrowing costs increase, not decrease, with higher rates.

Final answer: D