Monetary Policy

How do interest rates influence economic activity?

• By changing the incentives for households and businesses to save rather than consume or invest

• By directly increasing the GDP

• By reducing the inflation expectations

• By controlling the import prices

What is one effect of a reduction in interest rates on households?

• It reduces household consumption

• It increases the incentives for households to save

• It encourages households to borrow and spend now rather than later

• It decreases the demand for durable goods

What is the expected outcome of lower interest rates on business investment?

• Decrease in business investment

• Increase in business investment

• No change in business investment

• Decrease in household consumption

What is the impact of lower interest rates on the spending of businesses on investment?

• It decreases the spending on investment

• It increases the spending on investment

• It has no impact on the spending on investment

• It only affects the spending on consumer goods

Which of the following is NOT a channel through which interest rates influence economic activity?

• Cash flow channel

• Exchange rate channel

• Labor market channel

• Asset prices and wealth channel

What is the impact of lower interest rates on households' spending decisions?

• It reduces their spending

• It increases their spending

• It has no effect on their spending

• It makes their spending unpredictable

According to the text, why is the spending of borrowers more sensitive to changes in cash flow than the spending of lenders?

• Borrowers have more disposable income.

• Borrowers are more likely to be constrained by the amount of cash they have available.

• Lenders have higher interest rates.

• Lenders have more assets.

Which of the following is NOT a key determinant of household and business spending according to the asset prices and wealth channel?

• Asset prices.

• Wealth.

• Government policies.

• Interest rates.

What is the relationship between interest rates and the present value of assets according to the wealth channel?

• Higher interest rates increase the present value of assets.

• Lower interest rates decrease the present value of assets.

• Lower interest rates increase the present value of assets.

• Interest rates have no effect on the present value of assets.

Which households are more sensitive to changes in housing wealth?

• Older households

• Younger households

• Households with no assets

• Households with fixed incomes