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Effects of Lower Interest Rates
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If the central bank decreases interest rates, which of the following is the most direct effect on the economy in the short run?

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Choose the Best Answer

A

Decrease in consumer spending

B

Increase in borrowing and investment

C

Rise in inflation expectations

D

Decrease in aggregate demand

Understanding the Answer

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Answer

When a central bank decreases interest rates, it makes borrowing money cheaper for individuals and businesses. This means that people are more likely to take out loans to buy homes, cars, or invest in new projects. As a result, spending in the economy tends to increase, which can lead to more jobs and higher demand for goods and services. For example, if a small business can get a loan at a lower interest rate, it might decide to expand its operations, hire more workers, and produce more products. Overall, the most direct effect of lower interest rates is an increase in economic activity through higher borrowing and spending.

Detailed Explanation

When interest rates go down, borrowing money becomes cheaper. Other options are incorrect because Some might think lower rates mean people spend less; It's a common belief that lower rates always lead to higher inflation expectations.

Key Concepts

Lower Interest Rates
Aggregate Demand
Cyclical Unemployment
Topic

Effects of Lower Interest Rates

Difficulty

medium level question

Cognitive Level

understand

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