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Final answer:
Increasing interest rates in the economy lead to higher production costs, reduced demand for finished goods, reluctance in business borrowing, and increased prices of finished goods.
Explanation:
Effects of Increasing Interest Rates in the Economy:
- Production cost increases: When financial institutions raise interest rates, businesses face higher costs of borrowing and production, reducing their profitability.
- Demand for finished goods decreases: Due to increased costs, businesses cut back on production, leading to a decrease in the demand for finished goods.
- Business shies away from borrowing: Higher interest rates deter businesses from borrowing money from banks, impacting their investments and expansion plans.
- Price of finished goods increases: With reduced supply and decreased demand, the equilibrium price of finished goods rises.
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