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An exogenous drop in interest rates,constitutes a positive aggegate demand shock because lower interest rates means...

An exogenous drop in interest rates,constitutes a positive aggegate demand shock because lower interest rates means more loans and credit spending,which boost Consumption exepnditure
True or False

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Answer #1

We know that when rate of interest is low, the people will borrow more money and the investment will increase, which in turn have positive impact on the demand. The demand may also increase.

A low interest rate increases the demand for investment as the cost of investment falls with the interest rate. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand. When rate of interest is low consumption spending is more.

The correct option is (True).

Hope you got the answer.

Kindly conment if you need further explanation.

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