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Effects of Lower Interest Rates
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Which of the following are likely short-run effects of a decrease in administered interest rates by the central bank? Select all that apply.

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Choose the Best Answer

A

Increased borrowing by businesses

B

Higher inflation rates

C

Increased consumer spending

D

Decreased unemployment

E

A decline in aggregate demand

Understanding the Answer

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Answer

When the central bank lowers interest rates, it makes borrowing money cheaper for people and businesses. This can lead to more loans being taken out, which means people may buy more homes, cars, or start new businesses. As a result, spending in the economy can increase, which might cause businesses to hire more workers and boost economic growth in the short run. For example, if a small business can borrow money at a lower rate, it might decide to expand and hire two more employees. Overall, lower interest rates can stimulate economic activity quickly, leading to increased spending and investment.

Detailed Explanation

Other options are incorrect because Some might think that lower interest rates mean businesses will borrow more; People might believe that lower interest rates automatically lead to higher inflation.

Key Concepts

Monetary Policy
Aggregate Demand
Unemployment
Topic

Effects of Lower Interest Rates

Difficulty

easy level question

Cognitive Level

understand

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