In November 2017, the Bank of England raised interest rates for the first time in 10 years, increasing the base rate from 0.25% to 0.5%. Please highlight a possible effect of this change on Aggregate Demand in the UK's economy.

One possible effect of this change in interest rate is a decrease in aggregate demand. As interest rates are inversely linked to investment, a component of aggregate demand responsible for approximately 15% of GDP, increasing the interest rate will have a negative effect on investment. The opportunity cost of investing increases, as money borrowed has a higher cost (especially considering the base rate of interest is scarcely the same as the lending rate) and businesses are less likely to make decisions for expansion if said decisions carry risk of a magnitude greater than the cost of borrowing. Another possible effect on this change in interest rate is an increase in Aggregate Demand, fueled by foreign direct investment. When the domestic interest rate increases, it is extremely likely to see an influx in the hot money flows into the economy. This happens especially when the interest rate of the domestic country increases above the level of interest rates in the country of the investor. As this acts like an injection into the circular flow of income, the economy could grow via a multiplier effect where there is an increase in demand of scale >1 of the increase in income (hot money flows). This however does depend on a couple of other factors; the real exchange rate between the countries (the interest parity condition must hold for foreign direct investment to be possible) and the level of bureaucracy, certain red tape may be in place which does not allow for money to flow free of charge between countries.