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Interest Rates and Economic Effects
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A country experiences a significant decrease in interest rates due to a shift in monetary policy aimed at stimulating the economy. As a result, what is the most likely immediate effect on the economy, considering the relationships between interest rates, consumption, and investment?

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Choose the Best Answer

A

Increased consumption and investment will lead to higher price levels and real income.

B

Decreased consumption and investment will result in lower price levels and real income.

C

Consumption will decrease while investment increases, leading to stagnant price levels.

D

Interest rates decrease but have no effect on consumption and investment.

Understanding the Answer

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Answer

When a country lowers its interest rates, it becomes cheaper for people and businesses to borrow money. This usually encourages more spending and investment because loans for things like homes or new equipment cost less. As people spend more, businesses see an increase in demand for their products and services, which can lead to more hiring and economic growth. For example, if a small business can take out a loan at a lower rate to buy new machinery, it might produce more goods and hire additional workers. Overall, lower interest rates help stimulate the economy by boosting consumption and investment.

Detailed Explanation

When interest rates go down, borrowing money becomes cheaper. Other options are incorrect because This answer suggests that lower interest rates make people spend less; This option says spending goes down while investment goes up.

Key Concepts

Interest Rates
Aggregate Demand-Aggregate Supply Model
Monetary Policy
Topic

Interest Rates and Economic Effects

Difficulty

hard level question

Cognitive Level

understand

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