The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008
Other things remaining the same, which of the following components will decrease in response to the bank's actions?
I. exchange rate
II. interest rate
III. investment

Question

Quizplus · Accepted Answer

Lowering the lending rate typically leads to a decrease in interest rates and can lead to a depreciation of the exchange rate as lower interest rates make a currency less attractive to foreign investors. Investment, however, is likely to increase due to lower borrowing costs.

The People's Bank of China Announced That It Was Lowering