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    So the question is:

    23 Which one of the following statements relating to monetary policy is correct?

    A A cut in interest rates always increases inflation.
    B While reducing excess demand, an interest rate rise may increase cost-push inflation.
    C Interest rate changes have no effect on aggregate supply.
    D An increase in interest rates will raise the level of investment

    I thought it was A. But the answer is B.
    The only thing about A, I wasn't sure about was the always part. Though I still don't see how its B. Because cost push will decrease the supply? How will that reduces excess demand?
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    increases business costs making debts more expensive to finance? Which shifts SRAS left.
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    The reason it isn't A is because a cut in interest rates does not always increase inflation because investment/consumption is not going to increase if confidence is low. You can link this with the 2009 recession where interest rates were cut heavily but AD did not change that much, and remained low.
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    (Original post by Kaasi)
    The reason it isn't A is because a cut in interest rates does not always increase inflation because investment/consumption is not going to increase if confidence is low. You can link this with the 2009 recession where interest rates were cut heavily but AD did not change that much, and remained low.
    yep yep, also depends on how much it's cut and what it was in the first place.
 
 
 
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