How does a reduction in interest rates affect the level of aggregate demand

Aggregate demand (AD) is total spending on goods and services. The formula = AD = C (consumption) + I (investment) + G (government spending) + (X (exports) - M (imports))Interest rates = rate of percentage of which is charged to loans and paid out/received on savings How does reducing interest rates affected aggregate demand:Cost of borrowing (Investment) - a reduction of interest rates means the costs of borrowing for firms will decrease and the incentive and reward to save will decrease as well. This means the opportunity cost to borrow will decrease and the expected returns on investments will be higher (as costs down). Therefore, the level of AD increases as there is more borrowing and more investment. (Eval point - Dependent on profit level - however, borrowing is often necessary for investment as profits aren't enough to finance investment projects).Saving and Consumption - a reduction in interest rates makes saving less attractive as there is less reward. In addition, it also reduces the cost of borrowing for consumers. Consumers will subsequently borrow more and therefore spend more (marginal propensity to save will reduce). Increase in consumption and therefore AD. Increase in consumption leads to increase in investment (positive multiplier effect) - If consumption increases then the demand for goods and services also rises. Firms may respond to this increase in demand by increasing their productive capacity - investing in improving their quality and quantity of production and process. An increase in investment increase the level of AD further. Evaluation - the amount AD rises depends on the extent to which the increase in borrowing is used to finance imports. A large increase in imports relative to exports can cause aggregate demand to reduce Evaluation - the relative size of the AD components - consumption the largest Evaluation - how large the decrease of interest rates is Evaluation - a rise in AD can cause rise in inflation Diagram to demonstrate AD shifting to the right Relate to UK economy - In 2016 the Bank of England cut interest rates to 0.25%