How would a reduction in interest rates lead to an increase in Economic Growth?

A reduction in interest rates would lead to a boost in Aggregate Demand and therefore an increase in real national output. If the monetary policy committee decide to reduce interest rates then the incentive to borrow will decrease and the incentive to invest will increase. If the incentive to invest increases, more people will shift from having standard current accounts to instead an investment portfolio. These portfolios will be used to invest money to buy firm's bonds. Firm's bond will be used to increase their physical capital stock. This is known as investment in macroeconomic terms. Investment is a component of aggregate demand. So long as the economy isn't at the level of full employment, an increase in aggregate demand will lead to a subsequent increase in real nation output, otherwise known as economic growth.

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Answered by Sebastian C. Economics tutor

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