Question

A reduction in the interest rate causes consumption and investment to _____, which shifts the aggregate...

A reduction in the interest rate causes consumption and investment to _____, which shifts the aggregate demand curve _____.

a. rise; leftward

b. rise; rightward

c. fall; leftward

d. fall; rightward

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Answer #1

When interest rate decreases, people want to hold more cash in hand, so the consumption increases because opportunity cost of the keeping money in hand decreases.

On the other hand, when interest rate decrease the cost of borrowing decreases, so firm will borrow more for investment. Hence investment rises.

Since Consumption and investment rises and these are part of the AD, so the AD increases and the AD curve shifts rightward.

Hence option b is the correct answer.

b. rise; rightward

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