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Answer: Expansionary, as lowering interest rates increases liquidity to stimulate the economy.
When the economy is slowing and inflation trends are weakening, central banks may cut their target interest rates to boost liquidity. Such actions are termed expansionary monetary policy. This approach aims to stimulate economic activity by making borrowing cheaper, thereby encouraging spending and investment. Conversely, contractionary policy (raising rates) reduces liquidity to control inflation, while a neutral policy maintains a balance without influencing economic activity.
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To enhance liquidity, a central bank is most likely to adopt an interest rate policy that is:
A
Contractionary, as raising interest rates reduces liquidity to curb inflation.
B
Neutral, as it neither stimulates nor restrains economic activity.
C
Expansionary, as lowering interest rates increases liquidity to stimulate the economy.
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