If the central bank lowers its policy rate and banks pass the reduction on to borrowers, the most direct short-run effect is likely to be:
Correct answer: A. Lower borrowing costs and higher private investment
- A. Lower borrowing costs and higher private investment
- B. Higher borrowing costs and lower private investment
- C. Lower exports and higher import duties
- D. Higher tax revenue without economic growth
Explanation
A lower policy rate can reduce market lending rates, encouraging firms and households to borrow and spend more. The resulting increase in investment is a monetary transmission effect, although its size depends on credit demand and financial conditions.
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About Economy of Pakistan
Pakistan's economy is examined through agriculture, industry, services, trade, remittances, employment, population, poverty and regional development. The topic also covers GDP and national income, inflation, fiscal and monetary policy, taxation, public debt, the balance of payments, energy constraints and structural challenges, including the role of the State Bank and development planning.
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