If the central bank lowers its policy interest rate, we would expect this to: Group of...

If the central bank lowers its policy interest rate, we would expect this to:

Group of answer choices

decrease the unemployment rate

decrease aggregate demand

increase market interest rates

decrease the inflation rate

Solutions

Expert Solution

If the central bank lowers its policy interest rate, we would expect this to:

Choices

decrease the unemployment rate
decrease aggregate demand
increase market interest rates
decrease the inflation rate

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Correct choice:

decrease the unemployment rate

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Explanation:

A decrease of the policy interest rate implies that all the other interest rates will also decline. Banks will now offer credit at lower rates. Market interest rates will fall.

Due to this, firms and households will be able to borrow more. Firms will borrow and expand their businesses. The need for employees will rise, and unemployment will fall.

Since firms and households will now borrow more, investment and consumption will rise. This will increase aggregate demand.

Lower interest rates and higher aggregate demand also imply that inflation rate will rise. A low interest rate regime is termed expansionary, as it encourages more borrowing and spending. Higher demand and expenditure will cause inflation, till the time supply can match up.

Rahul Sunny answered 2 months ago

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