Can you please explain and show graphically how the change in interest rates affects aggregate demand

Expert Solution

The aggregate demand is the sum of consumption expenditure , investment expenditure , government expenditure and the net exportrs. Any change in these components will change the aggregate demand.

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The interest rate rate is normally is the cost of borrowing and it affects the investment expenditure so the aggregate demand. A rise in the interest rate is an increase in the cost of borrowing so the business will borrow less compared to previous so the investment expenditure will shrink as the investment declines the aggregate demand also decreases. Similary as the interest rate decreases the cost of borrowing also decrease and this will increase the aggregate demand.

The given below is a illustartion of how a decrease in the interest rate can affect the aggregate demand.

The decrease in the interest rate would induce the investment and consumption activities in the econmy and there bt increase the aggregate demand. The increase in the aggregate demand is shown by the rightward shift of the AD curve , as the aggregate demand increases the price level and the output will also increase. This is opposite when there is an increase in the interest rate , the rise in interest rate makes the borrowing more costly and this decreases the aggregate demand.

Rahul Sunny answered 8 months ago

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