Impact of interest rates on aggregate demand: How do interest rates affect consumption and investment in the economy?
Understand the Problem
The question discusses the impact of interest rates on aggregate demand, particularly focusing on consumption and investment behavior in economic terms.
Answer
Higher rates reduce consumption and investment; lower rates increase them.
The impact of interest rates on aggregate demand occurs through consumption and investment. Higher rates discourage borrowing, reducing consumer spending on large purchases and business investments. Lower rates encourage borrowing, boosting consumption and investment, thereby increasing aggregate demand.
Answer for screen readers
The impact of interest rates on aggregate demand occurs through consumption and investment. Higher rates discourage borrowing, reducing consumer spending on large purchases and business investments. Lower rates encourage borrowing, boosting consumption and investment, thereby increasing aggregate demand.
More Information
Interest rates significantly influence economic activities by altering borrowing costs for consumers and businesses. This, in turn, affects their spending and investment behaviors, impacting overall economic growth.
Tips
A common mistake is ignoring how changes in consumer confidence and expectations also influence consumption and investment.
Sources
- Recession and full employment in the AD/AS model - khanacademy.org
- Monetary Policy - How Rising Interest Rates affect Aggregate Demand - tutor2u.net
- How Interest Rates Affect the U.S. Markets - investopedia.com
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