Interest Rate Policies and Their Effects

Explain why Singapore is an interest rate taker.

• Singapore has a large economy that dictates global interest rates.

• Singapore is a small and open economy reliant on capital inflows and follows global interest rates.

• Singapore has fixed interest rates set by the government regardless of global trends.

• Singapore's economy is isolated and does not respond to international financial markets.

What are the Time Lags limitations of interest rate policy?

• Implementation time lag: Time between recognizing an economic problem and putting the policy into effect.

• Response time lag: A considerable period may elapse after implementation before the policy takes effect.

• Central Banks can change interest rates instantly without any delay.

• Interest rate policy has no time lag limitations.

How does lower interest rate affect firms' investment (I)?

• Increases the cost of borrowing for firms, making investments less profitable.

• Reduces the cost of borrowing for firms, making investments more profitable.

• Has no effect on firms' investment decisions.

• Increases the rates of return on investment, encouraging less investment.

How does contractionary interest rate policy affect Aggregate Demand (AD) and the economy?

• Increases consumption (C) and investment (I), leading to a rise in AD.

• Decreases consumption (C) and investment (I), leading to a fall in AD.

• Has no effect on consumption (C) and investment (I), keeping AD constant.

• Increases Aggregate Demand (AD) while decreasing the general price level.

How does lower interest rate affect household consumption (C)?

• Reduces the cost of borrowing for purchasing goods and services, encouraging more spending.

• Increases the returns on savings, making saving more attractive.

• Decreases households' willingness to borrow for big-ticket items like cars and houses.

• Reduces households' willingness to save, leading to less consumption.

How does expansionary interest rate policy affect Aggregate Demand (AD) and the economy?

• It decreases consumption and investment, leading to a fall in AD.

• It increases consumption and investment, leading to a rise in AD.

• It has no effect on consumption and investment, keeping AD constant.

• It only affects investment, with no impact on consumption.

What is the Liquidity Trap limitation of interest rate policy?

• The central bank can reduce interest rates to stimulate the economy effectively.

• The central bank may not be able to reduce interest rates further when they are near zero.

• The central bank can increase interest rates to combat inflation effectively.

• The central bank can always stimulate the economy by lowering interest rates.

What is contractionary interest rate policy?

• A policy used to stimulate economic growth during a recession.

• A policy adopted to reduce inflation when the economy is overheating.

• A strategy to increase money supply and lower interest rates.

• A method to control unemployment by lowering interest rates.

How does higher interest rate affect household consumption (C) and firms' investment (I)?

• Increases the cost of borrowing for households and firms, discouraging consumption and investment.

• Decreases the attractiveness of saving, leading to higher consumption.

• Encourages firms to invest more due to lower borrowing costs.

• Increases household willingness to borrow for big-ticket items.

What is expansionary interest rate policy?

• A policy used to increase interest rates to control inflation.

• A strategy employed when the economy is booming to reduce spending.

• Used when the economy is heading towards a recession with high cyclical unemployment. The central bank lowers the interest rate.

• A method to stabilize the economy by maintaining current interest rates.