Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By lowering interest rates to make borrowing cheaper, stimulating investment and consumption which can reduce unemployment
B
By raising interest rates to decrease aggregate demand, which can lead to increased unemployment
C
By maintaining current interest rates regardless of economic conditions, thereby stabilizing unemployment
D
By implementing fiscal policy changes that have no relation to monetary policy
Understanding the Answer
Let's break down why this is correct
Answer
Monetary policy tools, especially interest rate adjustments, play a crucial role in influencing aggregate demand, which is the total demand for goods and services in an economy. When a central bank lowers interest rates, borrowing becomes cheaper for individuals and businesses. This encourages people to take loans for big purchases, like homes or cars, and businesses to invest in new projects, leading to increased spending overall. As aggregate demand rises, companies may need to hire more workers to meet the higher demand, which can reduce unemployment levels. For example, if a bank lowers interest rates, a small business might decide to expand and hire more staff, helping to decrease the unemployment rate in the community.
Detailed Explanation
Lowering interest rates makes loans cheaper. Other options are incorrect because Raising interest rates can make borrowing expensive; Keeping interest rates the same doesn't help the economy grow.
Key Concepts
Supply-side economics
Monetary policy
Topic
Aggregate Demand and Unemployment
Difficulty
medium level question
Cognitive Level
understand
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