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An increase in interest rates will -decrease Aggregate Demand -increase Long run Aggregate Supply -decrease Long...

An increase in interest rates will

-decrease Aggregate Demand

-increase Long run Aggregate Supply

-decrease Long run Aggregate Supply

-increase Short run Aggregate Supply

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Answer #1

option 1

Effects of an increase in interest rates on the component of AD

Consumption:

Consumption decreases as the consuming from borrowing is expensive as well as repaying is expensive on old debts which decreases consumption.

Investments :

Decreases investments as the investments are less attractive.

Government expenditure: It also decreases because most of the time the government also take debt to spend, and it is expensive after the increase in the interest rate

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in total AD decreases.

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AS will not change.

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