• This is a political forum that is non-biased/non-partisan and treats every person's position on topics equally. This debate forum is not aligned to any political party. In today's politics, many ideas are split between and even within all the political parties. Often we find ourselves agreeing on one platform but some topics break our mold. We are here to discuss them in a civil political debate. If this is your first visit to our political forums, be sure to check out the RULES. Registering for debate politics is necessary before posting. Register today to participate - it's free!

Told you so. (1 Viewer)

Onion Eater

Well-known member
Jun 28, 2008
Reaction score
Scottsdale, AZ
Political Leaning
Question #2 of my economics quiz asks:

Which of these statements about interest rates do you agree with?

a) Interest rates are pro-cyclical; they are up in good times and down in bad.

b) Interest rates are anti-cyclical; they are down in good times and up in bad.

c) Interest rates are unimportant; it is credit limits that affect the business cycle.

These answers reflect the mainstream, Austrian and axiomatic positions, respectively.

I explain:

Are interest rates procyclical [up in good times, down in bad] or anticyclical? In six words this question summarizes the difference between Hayekians and Keynesians. Keynesians believe, and every modern textbook proclaims, that interest rates are procyclical because the government is expected to lower them in its effort to rescue capitalism from its periodic bouts with recession. Hayekians believe that they are anticyclical because low interest rates lengthen the period of production, causing a boom, and then, when the currency is inevitably attacked, the defensive raising of interest rates shortens the period of production, causing a bust.

Basically, Keynesians believe that market forces are unreliable and the government responds to recessions by lowering interest rates. Depressions are endemic to capitalism and it is not their severity and recalcitrance but their absence that requires explanation. Hayekians believe that the government is unreliable and the market responds to unnaturally low interest rates with an attack on the currency which provokes a recession. But, since interest rates come back down as soon as the threat to the currency is past, the severity and recalcitrance of the slump still requires explanation.

Observe that interest rates are now at historic lows and yet few people are buying houses because they cannot qualify. This is very frustrating for the Fed, who had hoped that lowering interest rates would have done more to boost the economy.

Obviously, they have not studied axiomatic economics or they would have known that interest rates are unimportant, it is credit limits that affect the business cycle.
Interest rates are determined by a central bank, or if there is no central bank, determined by savings rate and the amount of capital lent. :)
The answer is either a or b depending upon whether there is a demand or supply shock. If there is a supply shock, a central bank could lower interest rates to fight unemployment or raise interest rates to fight inflation.
Last edited:

Users who are viewing this thread

Top Bottom