Over the past eighteen months, the central bank has systematically lowered its benchmark interest rate to stimulate a sluggish economy. With inflation now stable near its target, policymakers have signalled that borrowing costs will remain low for the foreseeable future. Commercial banks have responded by reducing rates on corporate loans and capital financing packages.
While some risk-averse firms remain hesitant, industry surveys show a marked improvement in business sentiment. Many manufacturing and technology conglomerates, currently operating near full capacity, are reviewing their long-deferred expansion plans. Analysts suggest that this environment of cheap credit, combined with stable inflation, is poised to trigger a wave of capital projects, helping to modernize productive infrastructure and boost aggregate demand.
Extract D suggests that "this environment of cheap credit... is poised to trigger a wave of capital projects".
Explain why a sustained reduction in interest rates is likely to lead to an increase in business investment.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.