ExpertMedium2 marksMultiple Choice
Syllabus A: The business organisation and its external environmentSyllabus AMacroeconomicsMonetary Policy
ACCA · Question 19 · Syllabus A: The business organisation and its external environment
[Section A] A country is experiencing a period of high inflation. To combat this, the central bank decides to significantly increase the base interest rate. What is the intended macroeconomic effect of this policy?
[Section A] A country is experiencing a period of high inflation. To combat this, the central bank decides to significantly increase the base interest rate. What is the intended macroeconomic effect of this policy?
Answer options:
A.
To decrease the cost of borrowing, encouraging consumers to spend more.
B.
To increase the cost of borrowing, thereby reducing consumer spending and business investment, which cools down demand-pull inflation.
C.
To increase government spending on public infrastructure projects.
D.
To directly lower the cost of imported raw materials for domestic manufacturers.
How to approach this question
Trace the logical chain: Higher interest rates -> more expensive loans -> less borrowing -> less spending -> lower inflation.
Full Answer
B.To increase the cost of borrowing, thereby reducing consumer spending and business investment, which cools down demand-pull inflation.✓ Correct
Raising interest rates is a contractionary monetary policy. It makes borrowing more expensive and saving more rewarding. This reduces consumer spending and corporate investment (aggregate demand), which relieves upward pressure on prices (inflation).
Common mistakes
Confusing monetary policy (central banks/interest rates) with fiscal policy (government/taxes/spending).
Practice the full ACCA BT — Business & Technology Practice Exam 2
52 questions · hints · full answers · grading
More questions from this exam
Q01[Section A] A global non-governmental organization (NGO) providing clean water infrastructure in ...MediumQ02[Section A] 'NovaTech', a rapidly growing AI startup, was initially built around its charismatic ...MediumQ03[Section A] A multinational pharmaceutical company is implementing blockchain technology to track...MediumQ04[Section A] A newly assembled cross-border remote team of software developers is currently experi...EasyQ05[Section A] An emergency room administrator at a busy urban hospital uses the Urgent/Important ma...Medium