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2 years ago

An increase in interest rates affects aggregate demand by

Business

1 answer:

KatRina [158]2 years ago

5 0

Answer:

A - shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level

D - consumption, investment, and net exports decrease; aggregate demand decreases.

Explanation:

If interest rates increase, it becomes more expensive to borrow money (since there is a larger amount to be paid back on top of the value of the loan) and more beneficial to save money (since banks will pay more for saving). This means that consumers are less likely to take out loans and more likely to store their money in the bank, leading to a reduction in consumption—less consumer spending, more saving. Likewise with firms, which will be less likely to invest in new capital (because borrowing funds to buy it costs more) and more likely to save profits. This reduction in consumption and investment means that aggregate demand falls, represented in a diagram by a shift to the left.

Thanks

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