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A typical feature of depression described in the chapter is that interest rates fall, yet demand for credit still declines mainly because:
AInvestor confidence has collapsed
BInput prices are rising too fast
CWages are rising above market rates
DAggregate demand is at a new peak
Answer & Solution
Correct answer: A. Investor confidence has collapsed
1. The chapter notes interest rates fall in depression and the demand for holding liquid cash rises.
2. Even so, cheap credit is not taken up the way one might expect.
3. Despite lower interest rates, the demand for credit declines because investors' confidence has fallen.
4. So the main reason is the collapse of investor confidence.
5. "Input prices rising" and "wages rising" are ruled out: both are depressed, not rising.
6. "Aggregate demand at a peak" is ruled out: demand is at its lowest, not at a peak.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 5 "Business Cycles", p.3_
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