In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, Chairman of the Federal Reserve stated that ʺpolicy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.ʺ
If all the banks enacted the policy simultaneously, which of the following expenditure components would increase in the United States?
i. exports
ii. consumption
iii. investment

Question

Quizplus · Accepted Answer

By decreasing interest rates, the central banks aimed to stimulate economic activity and increase borrowing and spending. Lower interest rates would make it cheaper to borrow money to invest in businesses (investment) and purchase goods and services (consumption). This would lead to an increase in both investment and consumption. However, exporting is not directly affected by interest rate changes, so i is not correct. Therefore, the correct option is B (ii and iii only).

In October 2008, Central Banks Around the World Coordinated a Decrease