Suppose the Reserve Bank lowers the cash rate. In the months that follow, the quantity of money and the supply of loanable funds ________, and the long-term real interest rate ________.

Question

Quizplus · Accepted Answer

When the Reserve Bank lowers the cash rate, it becomes cheaper for banks to borrow money, which typically leads to an increase in the quantity of money and the supply of loanable funds. As the supply of loanable funds increases, the long-term real interest rate tends to fall due to the inverse relationship between the supply of funds and the interest rate.

Suppose the Reserve Bank Lowers the Cash Rate