## Step 1: Analyze the Policy Action The central bank is **reducing the benchmark interest rate** in response to slowing economic growth. Lowering interest rates is an **expansionary monetary policy** meant to stimulate the economy by making borrowing cheaper. - **Explanation:** Lower rates generally encourage borrowing and spending by businesses and consumers. --- ## Step 2: Evaluate the Options - **A** and **D** refer to "higher interest rates," which is the opposite of the policy described. - **C** claims "lower interest rates directly reduce government spending and tax revenue," which is not the direct effect of lower rates. - **B** states "lower interest rates encourage borrowing, increasing consumption and investment," which matches the expected outcome of the policy. - **Explanation:** Lower benchmark interest rates typically lead to increased borrowing, higher consumption, and more investment. --- ## Final Answer **B. Lower interest rates encourage borrowing, increasing consumption and investment**

# Step-by-Step Analysis of Central Bank Interest Rate Decision ## Step 1: Analyze the Policy Action The central bank is **reducing the benchmark interest rate** in response to slowing economic growth. This action is part of an **expansionary monetary policy** designed to stimulate the economy by making borrowing more affordable. - **Explanation:** When interest rates decrease, the cost of loans goes down. This typically leads to increased borrowing by both consumers and businesses, aiming to boost spending and investment. --- ## Step 2: Evaluate the Options Now let's assess each option in light of the interest rate reduction: - **A. Higher interest rates will reduce borrowing and decrease investment** - This option contradicts the current action of reducing interest rates. - **B. Lower interest rates encourage borrowing, increasing consumption and investment** - This correctly reflects the expected outcome of reducing interest rates, as it promotes borrowing and subsequently boosts economic activity. - **C. Lower interest rates directly reduce government spending and tax revenue** - This option is misleading; lower interest rates do not directly reduce government spending or tax revenue. - **D. Higher interest rates stimulate savings and reduce aggregate demand** - Similar to option A, this option discusses higher rates, which is not relevant to the current reduction in rates. - **Explanation:** Among the options, only option B aligns with the economic theory that lower interest rates stimulate borrowing, consumption, and investment. --- ## Final Answer **B. Lower interest rates encourage borrowing, increasing consumption and investment**