In December, the Bank of England reduced interest rates by another 50 basis points after points a basis point is 0.01 percentage point) it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists ʺ... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,ʺ...while others ʺ...saw a bigger 75 point cutʺ...or ʺa 100 basis point move.ʺ Data show that ʺ... inflation staged its biggest drop since records began ...potentially opening the door to even bigger cuts.ʺ
Reuters, 11/27/2008
If the Bankʹs policies given above can__________ the real long -term interest rate,the Bank will be able to__________

Question

Quizplus · Accepted Answer

By lowering interest rates, the Bank of England can lower the real long-term interest rate, which can increase aggregate demand. Lower interest rates make borrowing cheaper, leading to increased spending by consumers and investment by firms. This can stimulate economic growth and increase overall demand for goods and services, leading to an increase in aggregate demand. Therefore, choice A is the best answer. Choices B and C are incorrect because lowering interest rates would not necessarily lead to an increase in the exchange rate or a decrease in investment. Choice D is incorrect because raising the real long-term interest rate would not necessarily increase short-run aggregate supply.

In December, the Bank of England Reduced Interest Rates by Another