Explain how higher interest rates can impact the aggregate demand level in an economy and help close an inflationary gap?

Interest Rates changes can impact an economy in different ways. With higher interest rates, consumers are more prone to save (because they get more money in interests) and therefore they consume less. Furthermore, they are less prone to borrow money from banks (it is more expensive to do so) and therefore the investment level falls (as less people are borrowing money to set up businesses). Both Consumption and Investment are components of the Aggregate Demand curve and therefore, when a reduction in these components occurs, the aggregate demand curve will shift to the left, closing the inflationary gap.