Question

True or false: Expansionary monetary policy will increase the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output.

Answer 1

The statement is false.

Expansionary monetary policy are steps taken by the Central bank of an economy to increase the level of aggregate spending in the economy and bolster the economy.

One of the tools of an expansionary monetary policy is reducing interest rates. When interest rates are reduced, borrowing increases and spending increases. Aggregate demand rises and the real output increases. Increasing interest rate is an examples of a contractionary monetary policy.

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