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.

SC
Answered by Sebastian C. Economics tutor

2037 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain why the use of petrol and diesel cars may be a source of market failure.


What is Quantitative Easing and evaluate how it impacts an economy?


Explain the main sources of monopoly power.


Evaluate the likely economic effects of an increase in government expenditure on infrastructure


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