Question

You wake up tomorrow and discover that, seemingly overnight, everyone in the country has decided they need to buy an expensive new car right now - and they're willing to draw down on their savings and/or finance the purchase to do so. What does this do to interest rates? Select all that apply.

A.	They increase because the demand curve shifts to the right.
	B.	They increase because the demand curve shifts to the left.
	C.	They increase because the supply curve shifts to the right.
	D.	They increase because the supply curve shifts to the left.
	E.	They decrease because the demand curve shifts to the right.
	F.	They decrease because the demand curve shifts to the left.
	G.	They decrease because the supply curve shifts to the right.
	H.	They decrease because the supply curve shifts to the left.

Answer 1

As per the case, there is a decision taken by all the people to purchase a car by using their savings or finance or both. In this type of scenario, we can say that there is definitely a sudden surge of demand for finance as there are a significant number of buyers who will opt for finance. This will shift the demand curve towards right hence result in an increase in the interest rate.

Also, another perspective can be drawn from the scenario, that supply of finance might become limited as pet the requirement or demand in the economy because there is a sudden surge in it, and lenders might not have enough liquidity to cater to the need of all. So this will cause a shifting of the supply curve towards the left which will result in an increase in interest rate.

So, in either case, there is an increase in interest rate but in one case demand curve shifts to right whereas in the other supply curve shifts to left.

So, Option A and D are the possible outcomes.