Learning Path
Question & Answer
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Decrease in interest rates → Increase in investment → Increase in aggregate demand → Decrease in unemployment
Increase in interest rates → Decrease in investment → Decrease in aggregate demand → Increase in unemployment
Increase in government spending → Decrease in interest rates → Increase in aggregate supply → Increase in inflation
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
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 Effects
medium level question
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Deep Dive: Expansionary Monetary Policy Effects
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Definition
Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.
Topic Definition
Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.
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