If a central bank increases the policy interest rate, what is the likely immediate effect on aggregate demand in an economy?

A An increase in aggregate demand

B A decrease in aggregate demand

C No significant change in aggregate demand

D An increase in aggregate supply

✓ Correct Answer: Option B

An increase in interest rates makes borrowing more expensive, discouraging investment by firms and consumption by households, thereby leading to a decrease in overall aggregate demand.

💡 Why is B) the correct answer?

The correct answer to the question "If a central bank increases the policy interest rate, what is the likely immediate effect on aggregate demand in an economy?" is Option B: A decrease in aggregate demand.

The other options — A) An increase in aggregate demand, C) No significant change in aggregate demand, D) An increase in aggregate supply — are incorrect for this IB Exam Prep question. As explained above: An increase in interest rates makes borrowing more expensive, discouraging investment by firms and consumption by households, thereby leading to a decrease in overall aggregate demand.

📚 About This IB Exam Prep Practice Question

This 3-level IB Exam Prep question from the Economics topic is part of BrainForge Quiz's free exam preparation library. Each question includes the correct answer and a detailed explanation to help you understand the underlying concept, not just memorize the answer.

How to use this page: Read the question above, consider all four options (A through D), then check the highlighted correct answer and explanation. For active timed practice, start a free IB Exam Prep practice test or use flashcards for spaced repetition review.

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If a central bank increases the policy interest rate, what is the likely immediate effect on aggregate demand in an economy?

✓ Correct Answer: Option B

📚 About This IB Exam Prep Practice Question

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