What is the usual effect of a decrease in the central bank's policy interest rate on aggregate demand?
Correct answer: B. It raises borrowing and may increase investment
- A. It reduces borrowing and lowers consumption
- B. It raises borrowing and may increase investment
- C. It increases saving and reduces planned spending
- D. It lowers asset prices and decreases household wealth
Explanation
A lower policy rate tends to reduce market borrowing costs, encouraging interest-sensitive consumption and investment. The other choices describe effects more consistent with tighter monetary conditions.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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