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

2503 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What is inflation? What is the difference between real and nominal GDP and why is it important to measure GDP in real growth terms?


What are the Macroeconomic Effects of Currency Fluctuations?


What will be the effect of an increase in VAT within the UK on GDP?


Discuss whether than price discrimination is always beneficial


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:

© 2025 by IXL Learning