4.5.2 Interest Rates

• Lower interest rates increase borrowing and spending, which boosts aggregate demand
• What is the fundamental tool used by central banks in monetary policy to influence aggregate demand?

  Interest rates
• Lowering interest rates encourages consumers and businesses to borrow more money.

  True
• Steps taken by central banks to set interest rates

  1️⃣ Monitor economic conditions

  2️⃣ Determine policy objectives

  3️⃣ Adjust interest rates

  4️⃣ Influence aggregate demand
• What are two primary policy objectives of central banks based on economic conditions?

  Price stability and full employment
• What is monetary policy primarily concerned with managing?

  Money supply and interest rates
• Open market operations involve central banks buying or selling government securities to inject or withdraw liquidity from the market.


  True
• When interest rates are lowered, borrowing becomes cheaper, stimulating spending and boosting aggregate demand
• Why are interest rates critical in monetary policy?

  Influence borrowing and spending
• Higher interest rates reduce borrowing and spending, lowering aggregate demand
• Central banks track economic indicators like inflation and employment to monitor economic conditions.


  True
• Changes in the base interest rate affect consumer and business borrowing costs, ultimately influencing aggregate demand
• What is the official interest rate set by a central bank called?

  Base rate
• Higher interest rates reduce borrowing and spending, lowering aggregate demand.


  True
• Changes in interest rates directly affect aggregate demand by influencing consumer and business borrowing and spending
• Selling government securities withdraws liquidity
• Match the interest rate with its effect on aggregate demand:

  Higher ↔️ Decreases aggregate demand

  Lower ↔️ Boosts aggregate demand
• Steps central banks take to set interest rates

  1️⃣ Monitor economic conditions

  2️⃣ Determine policy objectives

  3️⃣ Adjust interest rates

  4️⃣ Influence aggregate demand
• Central banks adjust interest rates based on economic objectives like price stability.


  True
• Buying government securities injects liquidity and lowers interest rates.
• The base rate is the official interest rate set by the central bank.


  True
• Lower interest rates encourage consumer spending and business investment.


  True
• Monetary policy uses tools like interest rates, reserve requirements, and open market operations.
• Central banks use interest rates to encourage or discourage borrowing and spending
• Higher interest rates reduce borrowing and spending.

  True
• When interest rates are raised, it becomes more expensive for consumers to take out loans
• Steps in the process of how central banks set interest rates

  1️⃣ Monitor economic conditions

  2️⃣ Determine policy objectives

  3️⃣ Adjust interest rates

  4️⃣ Influence aggregate demand
• Central banks raise the base interest rate to combat inflation.


  True
• What are the three tools central banks use to manage interest rates?

  Base rate, open market operations, reserve requirements
• Buying government securities in open market operations lowers interest
• Changes in interest rates directly impact the level of aggregate demand
• Expansionary monetary policy can raise inflation if demand exceeds supply.


  True
• Match the interest rate change with its effects:

  Higher ↔️ Decreases aggregate demand

  Lower ↔️ Increases aggregate demand
• Lowering interest rates increases consumer and business spending, boosting aggregate demand.


  True
• Open market operations involve buying or selling government securities to inject or withdraw liquidity
• Open market operations involve buying or selling government securities
• Monetary policy aims to manage the money supply and interest rates to influence aggregate demand.


  True
• Lower interest rates increase borrowing and spending
• Central banks use interest rates to encourage or discourage borrowing and spending.

  True
• When interest rates are raised, borrowing becomes more expensive