When interest rates decrease,
A)investment will decrease, and consumption and net exports will increase, causing expenditures to increase.
B)government purchases will increase to offset the decline in consumption, investment, and net exports.
C)investment and consumption will increase, and net exports will decrease, causing expenditures to increase.
D)investment will decrease.
E)investment, consumption, and net exports will increase, causing expenditures to increase.

Question

Quizplus · Accepted Answer

When interest rates decrease, it becomes cheaper to borrow money. This encourages more investment as businesses can finance new projects at a lower cost. Consumers are also more likely to take out loans for big purchases, leading to an increase in consumption. Lower interest rates can lead to a depreciation of the domestic currency, making exports cheaper and imports more expensive, which boosts net exports. All these factors contribute to an increase in total expenditures.

When Interest Rates Decrease