Question:
Which of the following happens when the Central Bank reduces its policy interest rate?
(1) The demand for money decreases and market interest rates decrease
(2) The demand for money increases and market interest rates increase
(3) The supply of money decreases and market interest rates decrease
(4) The supply of money increases and market interest rates decrease
(5) The demand for money, the supply of money and market interest rates increase
Correct Answer:
(4)
Answer Explanation:
When the Central Bank reduces its policy interest rates (expansionary monetary policy), it makes borrowing cheaper for commercial banks. This encourages banks to lend more to the public, which increases the total supply of money in the economy, pushing general market interest rates down.
Topic: Monetary Policy Year: 2017
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