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In December, the Bank of England reduced interest rates by another 50 basis points (a basis...

In December, the Bank of England reduced interest rates by another 50 basis points (a basis point is 0.01 percentage point) after it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move."
Reuters, 11/27/2008
In order to ________, the Bank of England's rate cut must ________.

Question 3 options:

A increase consumption; decrease the real long-run interest rate

B increase real GDP; decrease the nominal long-run interest rate

C decrease consumption; increase the long-run interest rate

D decrease real GDP; increase the real long-run interest rate
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Answer #1

Answer a. increase consumption; decrease the real long-run interest rate.

reason- Fall in nominal interest rate should lead to fall in long run real interest rate, then only there will be increase in investment and increase in consumption and real GDP. So Bank of England must Decrease the real long run interest rate.

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