An increase in interest rates will
-decrease Aggregate Demand
-increase Long run Aggregate Supply
-decrease Long run Aggregate Supply
-increase Short run Aggregate Supply
Effects of an increase in interest rates on the component of AD
Consumption decreases as the consuming from borrowing is expensive as well as repaying is expensive on old debts which decreases consumption.
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
in total AD decreases.
AS will not change.
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