Question

On June​ 5, 2003, the European Central Bank acted to decrease the​ short-term interest rate by half a percentage point to 2 percent. The​ bank's president at the​ time, Willem​ Duisenberg, suggested that the bank could reduce rates further in the future. The likely impacts of such a rate cut were A. an increase in planned aggregate​ expenditure, an increase in aggregate income and​ output, and an increase in consumption. B. an increase in planned aggregate​ expenditure, an increase in​ consumption, and an ambiguous effect on aggregate income and output. C. a decrease in planned aggregate​ expenditure, an increase in​ consumption, and a decrease in aggregate income and output. D. an increase in planned aggregate​ expenditure, an increase in aggregate income and​ output, but an ambiguous effect on consumption.

Answer 1

The correct answer is option A.

Step-by-step explanation:

A decrease in the interest rate would lead to increase in the capital investment as the cost of borrowing gets reduced. With the increase in investment more output would be produced. In order to increase output more inputs will be hired, leading to increase in income. This increase in income would further contribute in increasing the consumption level.

So, we can conclude that because of decrease in interest rate, planned aggregate expenditure, income, output and consumption will increase.