Impact of Lowering Interest Rates

Question:

A central bank reduces interest rates. What would not be a consequence of this action?

A. A benefit for borrowers receiving loans

B. A fall in the international value of the currency

C. A reduction in inflation

D. An increase in GDP

Answer Description

The correct answer is C. A reduction in inflation.

Explanation: When a central bank reduces interest rates, it generally leads to several economic consequences. Here’s how each option plays out:

A. A benefit for borrowers receiving loans: Lower interest rates make borrowing cheaper, which benefits individuals and businesses taking out loans.

B. A fall in the international value of the currency: Lower interest rates can decrease a country’s currency value because they can lead to reduced foreign investment and lower demand for the currency.

C. A reduction in inflation: This is not typically a direct consequence of lowering interest rates. Lower interest rates often lead to increased spending and borrowing, which can increase inflation rather than reduce it.

D. An increase in GDP: Lower interest rates stimulate economic activity by making borrowing cheaper, which can lead to increased investment and consumer spending, thus potentially increasing GDP.

In summary, while lower interest rates can lead to benefits for borrowers, a decrease in the international value of the currency, and potentially an increase in GDP, they are less likely to directly result in a reduction in inflation.