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Interest Rates and Economic Effects
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If the central bank lowers interest rates, what is the most direct impact on the economy?

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Learning Path

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Choose the Best Answer

A

Increased consumption and investment

B

Decreased bond prices

C

Higher inflation without growth

D

Increased unemployment rates

Understanding the Answer

Let's break down why this is correct

Answer

When a central bank lowers interest rates, it becomes cheaper for people and businesses to borrow money. This means that individuals might take out loans to buy houses or cars, and businesses may invest in new projects or hire more workers. As borrowing increases, spending in the economy rises, which can lead to higher demand for goods and services. For example, if a local bakery can borrow money at a lower interest rate, it might expand and hire new staff, creating more jobs in the community. Overall, lower interest rates can stimulate economic growth by encouraging more spending and investment.

Detailed Explanation

When interest rates go down, borrowing money becomes cheaper. Other options are incorrect because Some might think lower interest rates mean bonds lose value; People might believe lower rates only cause prices to rise.

Key Concepts

Interest Rates
Economic Activity
Aggregate Demand-Aggregate Supply Model
Topic

Interest Rates and Economic Effects

Difficulty

medium level question

Cognitive Level

understand

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