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

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

---

Correct choice:

decrease the unemployment rate

---

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 8 months ago

Suppose a central bank decides it is appropriate to increase its policy interest rate in order...

Suppose a central bank decides it is appropriate to increase its policy interest rate in order to increase rates more generally throughout the economy. In the contex of the money market , if the money demand function is stable ,explain how the change in policy would be reflected in the money supply. Suppose the economy is a closed one. What effect will there be on investment, on aggregate expenditure? Include diagrams in your answer. What additional effect will there be...

Consider an economy in which the central bank uses the interest rate as its policy instrument....

Consider an economy in which the central bank uses the interest rate as its policy instrument. The policy-makers judge that the unemployment rate is too high and decide to pursue expansionary monetary policy to raise the output level. a. Illustrate and explain how expansionary monetary policy is expected to raise the output level. How would components of aggregate demand be affected by this policy? b. What are the limitations of expansionary monetary policy? What are the options available to the...

A6-11. Suppose a central bank decides it is appropriate to increase its policy interest rate in...

A6-11. Suppose a central bank decides it is appropriate to increase its policy interest rate in order to increase rates more generally throughout the economy. (a) Inthecontextofthemoneymarket,ifthemoneydemandfunctionisstable,explainhowthechangeinpolicy would be reflected in the money supply. [4] (b) Suppose the economy is a closed one. What effect will there be on investment, on aggregate expenditure? Include diagrams in your answer. [4] (c) What additional effect will there be on aggregate expenditure if the economy were an open one? [4] (d) How will...

“Request the central bank to raise interest rates. We acknowledge monetary policy considerations by the Central...

“Request the central bank to raise interest rates. We acknowledge monetary policy considerations by the Central Bank are always finely balanced amongst lowering inflation, safeguarding the balance of payments and supporting economic growth. The Ministry of Finance will request the Central Bank to have monetary policy cooperate with fiscal policy as far as possible by raising the repo rate. This will send a signal for the transmission of higher and rising interest rates throughout the financial system including an increase...

1..Expansionary fiscal policy ............... equilibrium output and ...................... the interest rate if the Central Bank keeps...

1..Expansionary fiscal policy ............... equilibrium output and ...................... the interest rate if the Central Bank keeps the money supply constant. Select one: a. raises----raises b. raises---falls c. falls---raises d. falls---falls 2.The less interest-sensitive money demand is, the more effective monetary policy is relative to fiscal policy. Select one: True? False? 3.Which of the following is not cause the LM curve to shift right? Select one: a. fall in the money demand b. all of the above c. fall in the...

1 When the Bank of Canada lowers the overnight rate, the Canadian interest rate differential ________...

1 When the Bank of Canada lowers the overnight rate, the Canadian interest rate differential ________ and the Canadian dollar ________ on the foreign exchange market. A) increases; appreciates B) increases; depreciates C) decreases; appreciates D) decreases; depreciates E) decreases; reaches interest rate parity 2. When real GDP is less than potential GDP, an increase in the quantity of money leads to a(n) A) increase in both real GDP and the price level. B) decrease in real GDP and an...

The interest rate policy followed by the Central Bank of major world economies (USA, UK, Japan,...

The interest rate policy followed by the Central Bank of major world economies (USA, UK, Japan, Europe) are near zero or negative. Discuss the implication this low-interest rate policy for any one type of financial institution (banks, savings, and loans, insurance companies, pension funds, mutual funds, etc.) and examine its possible impact.

Question

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

Solutions

Expert Solution

Related Solutions