What are the possible effects of a decrease in the interest rate set by the central bank?

A decrease in the real interest rate will reduce the cost of borrowing for firms, so these firms will tend to borrow more to finance investment. There may also be a consumption effect if consumers decide to spend more and save less in response to lower interest rates. Investment and consumption will both be higher.  As AD = C + I + G + (X-M), then an increase in consumption and investment will lead to higher aggregate demand. In an AD/AS diagram, this would be shown by an outwards shift in the AD curve leading to higher output and a higher general price level. 

[then draw diagram on whiteboard]

VN
Answered by Vedanth N. Economics tutor

2400 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain the main sources of monopoly power.


Why does profit maximisation occur where MR=MC?


How does a firm maximise revenue (linear revenue curves)?


Explain 4 key sources of monopoly power.


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning