What is the primary reason the Bangko Sentral ng Pilipinas (BSP) raises interest rates when inflation rises?
A. To increase wages
B. To lower unemployment
C. To encourage more borrowing
D. To reduce consumer spending
Answer (2)
The correct answer is letter D. To reduce consumer spendingThe BSP raises interest rates when inflation becomes too high because it wants people and businesses to spend less. When interest rates go up, loans for buying cars, houses, or even starting a business become more expensive. As a result, fewer people borrow and spend, and this reduces the overall demand for goods and services. Less demand means businesses won’t raise prices as fast, and inflation slows down.For example, during 2022 in the Philippines, inflation rose because of rising fuel and food prices. To control this, the BSP increased interest rates several times. This helped reduce demand for things like house loans and new gadgets, and it slowly helped cool down inflation.
The correct answer is D. To reduce consumer spending.When inflation rises, prices of goods and services increase, reducing the purchasing power of money. To control inflation, the Bangko Sentral ng Pilipinas (BSP) raises interest rates. Higher interest rates make borrowing more expensive and saving more attractive, which leads people and businesses to borrow and spend less. Reduced spending helps slow down demand, which in turn helps lower inflation.
