Canadian Securities Course (CSC) Level 1 Practice Exam

Which of the following contributes to the rise in interest rates in the context of demand and supply of capital?

1. Decrease in government deficit

2. Reduction in businesses seeking capital

3. Increase in demand for capital due to economic growth

4. Rising savings rate among individuals

The correct answer is: Increase in demand for capital due to economic growth

The choice indicating an increase in demand for capital due to economic growth explains why interest rates would rise effectively. When an economy is growing, businesses often seek to expand operations, invest in new projects, or increase production to meet higher consumer demands. This increased demand for capital arises as companies require more funding to support these endeavors. As more businesses compete for available capital in the financial markets, lenders perceive this increased demand, which typically prompts them to raise interest rates. Higher interest rates serve as a way to balance the supply and demand for capital, as lenders seek to maximize their returns in a scenario where there is heightened demand. In contexts where the government deficit is decreasing or where businesses reduce their need for capital, the overall demand for funds may drop, potentially leading to lower interest rates. Similarly, a rising savings rate among individuals does not directly increase the demand for capital; instead, it can lead to more available funds in the market for lending, which might contribute to stable or lower interest rates.