Impact of Central Bank Interest Rate Policies During Expansion

Hard Economic Analysis Business Cycle Analysis

As an investment analyst at a wealth management firm, you are tasked with understanding how economic business cycles impact investment decisions. You focus on a nation that is currently experiencing a period of economic expansion characterized by rising GDP, increased consumer spending, and business investments.

You are invited to present your analysis at a team meeting to discuss strategic asset allocation. Your analysis is particularly focused on identifying potential risks and opportunities due to shifts in the business cycle. During the meeting, your colleague suggests that the central bank's actions regarding interest rates during this expansion phase could significantly influence various sectors of the economy.

Which of the following statements best describes the potential impact of the central bank's interest rate policies during this expansion phase?

Increasing interest rates could slow down economic growth by making borrowing more expensive, particularly impacting consumer discretion and capital expenditures.

Lowering interest rates during an expansion phase is typically a central bank's strategy to prevent overheating and is unlikely to occur.

Maintaining current interest rates throughout an expansion phase will likely have no effect on investment sentiment across sectors.

Hint

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