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What is the effect of lowering interest rates?

Practice Questions

Q1
What is the effect of lowering interest rates?
  1. Decreases consumer spending
  2. Encourages borrowing and spending
  3. Increases inflation immediately
  4. Reduces investment

Questions & Step-by-Step Solutions

What is the effect of lowering interest rates?
  • Step 1: Understand what interest rates are. They are the cost of borrowing money.
  • Step 2: When interest rates are lowered, it becomes cheaper to borrow money.
  • Step 3: People and businesses are more likely to take loans because they will pay less in interest.
  • Step 4: With more loans, people can spend more money on things like homes, cars, and businesses.
  • Step 5: Increased spending leads to more demand for goods and services.
  • Step 6: As demand increases, businesses may hire more workers and produce more products.
  • Step 7: This overall increase in spending and production helps stimulate economic growth.
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