Question
In the question below, two statements (
- I and (I
- I are given. These statements may be either independent causes or may be effects of independent causes or a common cause. One of these statements may be the effect of the other statement. Read both the statements and decide which of the following answer choices correctly depicts the relationship between these two statements. Statement I: Major central banks worldwide have significantly increased interest rates over the past twelve months to combat persistent inflationary pressures. Statement II: Consumer spending on non-essential luxury goods has plummeted, and many retail businesses are reporting a sharp decline in quarterly profits.
Solution
Analyze Statement I: This statement identifies a specific economic action—the rising of interest rates. High interest rates increase the cost of borrowing and reduce the amount of disposable income available to consumers. This serves as the cause. Analyze Statement II: This statement describes the resulting behavior—consumers spending less and businesses losing profit. When borrowing is expensive and inflation is high, the first thing consumers cut is "non-essential luxury goods." This is the logical effect of the fiscal tightening described in Statement I.
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