Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Decrease in interest rates → Increase in investment → Increase in aggregate demand → Decrease in unemployment
B
Increase in interest rates → Decrease in investment → Decrease in aggregate demand → Increase in unemployment
C
Increase in government spending → Decrease in interest rates → Increase in aggregate supply → Increase in inflation
D
Decrease in interest rates → Decrease in consumption → Decrease in aggregate demand → Increase in unemployment
Understanding the Answer
Let's break down why this is correct
Answer
When a central bank lowers interest rates and injects money into the economy, borrowing becomes cheaper and banks have more funds to lend. This encourages businesses and households to take loans, boosting spending on investment and consumption. The surge in demand pushes up production, employment, and overall output. As demand rises, prices begin to climb, creating a mild inflationary pressure. In a simple example, if a bank cuts rates from 5 % to 3 %, a homeowner might refinance a mortgage, a factory might buy new equipment, and the local economy will grow slightly while prices tick up.
Detailed Explanation
Lower interest rates make borrowing cheaper, so businesses spend more on equipment and hiring. Other options are incorrect because This option flips the idea: raising rates would raise borrowing costs, discouraging investment; Mixing government spending with monetary policy is wrong.
Key Concepts
Expansionary Monetary Policy
Aggregate Demand
Unemployment
Topic
Expansionary Monetary Policy Effects
Difficulty
medium level question
Cognitive Level
understand
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