Question

During a certain year, interest rates fall by 200 basis points (2

1) 2%
2) 3%
3) 4%
4) 5%

Answer 1

The correct option is A). A 200 basis point fall in interest rates is equivalent to a 2% decrease. The Federal Reserve adjusts these rates to manage economic conditions, and such a change typically influences the overall economy, including unemployment rates.

Step-by-step explanation:

When discussing a fall in interest rates by 200 basis points, we are specifically referring to a decrease of 2%. A 'basis point' is a common unit of measure for interest rates and other financial percentages, representing 1/100th of a percentage point. Thus, 200 basis points are equivalent to 2%. This type of monetary policy action is within the purview of central banks, such as the Federal Reserve, which adjusts interest rates in response to various economic conditions, such as inflation levels or economic growth rates.

For instance, during the early 1990s, the Federal Reserve decreased the federal funds interest rate from 8.1% to 3.5% as they were confident that inflation was under control. This shift in monetary policy was accompanied by economic expansion, which led to a decrease in the unemployment rate from 7.5% in 1992 to less than 5% by 1997.