What are the possible effects of a decrease in the interest rate set by the central bank?

A decrease in the real interest rate will reduce the cost of borrowing for firms, so these firms will tend to borrow more to finance investment. There may also be a consumption effect if consumers decide to spend more and save less in response to lower interest rates. Investment and consumption will both be higher.  As AD = C + I + G + (X-M), then an increase in consumption and investment will lead to higher aggregate demand. In an AD/AS diagram, this would be shown by an outwards shift in the AD curve leading to higher output and a higher general price level. 

[then draw diagram on whiteboard]

VN
Answered by Vedanth N. Economics tutor

2693 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

'Is Globalisation beneficial for all parties?'


What is the impact of a fall in the central bank interest rate on the macroeconomic performance of the UK economy?


Evaluate the benefits of using fiscal policy to stimulate economic growth


Explain two causes of inflation using AD/AS analysis.


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:

© 2026 by IXL Learning