An increase in interest rates affects aggregate demand by A. shifting the aggreg

Question

An increase in interest rates affects aggregate demand by

A.

shifting the aggregate supply curve to the left, decreasing real GDP and increasing the price level.

B.

shifting the aggregate supply curve to the right, increasing real GDP and lowering the price level.

C.

shifting the aggregate demand curve to the right, increasing real GDP and lowering the price level.

D.

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

As the interest rate increases,

A.

consumption, investment, and net exports increase, and aggregate demand increases.

B.

consumption, investment, and net exports fall but government spending increases, and aggregate demand increases.

C.

consumption increases but investment and net exports decrease; aggregate demand remains unchanged.

D.

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

Click to select your answer.

Explanation / Answer

1. D shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.

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

As interest rates increases, the individuals and businesses tend to borrow less and save more, thus the consumption by households and investment by businesses decreases. As consumption and investment decreases which are the main component of Aggregate demand, the Aggregate demand decreases and hence AD curve shifts to the left.

If you don't understand anything then comment , I'ill revert back on the same. :)

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