Interest rates play a vital role in the economy. What would that role be?

Expert Solution

When the Federal Reserve sells government securities in the open market, then money supply decreases in the economy, so money supply curve shifts leftward. As a result interest rate increases. Therefore when interest rate increases, then the investment become more expensive, so investment by the firms decreases, so production of goods and services decreases. AD curve shifts leftward, so quantity of real GDP decreases and vice-versa.

Hence it can be said that interest rates play a vital role in the economy. The role of interest rate to affect real GDP and price level in the economy through change in the investment.

Rahul Sunny answered 2 years ago

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