What impact would a cut in the base rate by the Bank of England have on Aggregate Demand?
The components of Aggregate Demand are: Consumption, Investment, Government Spending and Net Exports. A cut in the base rate would mean that Aggregate Demand will increase, shifting outwards. A reduction in the base rate will mean that cost of borrowing will decrease, and therefore more companies will choose to invest in their businesses. Similarly, consumption will also increase as interest rates will be lower, as this acts an incentive to spend and therefore increases the MPC.
GK
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