How does a reduction in the interest rate affect aggregate demand in a closed economy?

Aggregate demand in the economy is made up of a number of components. Firstly, it consists of 'Consumption' expenditure, which is all spending by households on goods and services within the economy - anything from food to clothes to washing machines. Secondly, it is made up of 'Investment' expenditure - spending by businesses and consumers on goods and services that, rather than satisfying immediate needs and wants, produce a return for the future. Thirdly, it is made up of 'Government' expenditure, which is all spending by the governments on things like health services, education and the police. Since we are assuming this is a closed economy, hence does not trade with the rest of the world, exports and imports are not relevant. 

A reduction in the interest first of all affects consumption expenditure. A lower interest rate reduces the cost of servicing a mortgage - a big monthly outgoing for most households. It also makes loans cheaper - it is more attractive to borrow money to buy a car or a household good. Hence, with the extra money, consumers can spend more on other goods. Secondly, a fall in interest rates affects investment. Most firms borrow money to invest, and if the cost of the interest on that falls, it makes it more likely that they will go ahead with the investment. If interest rates fall the return that can be achieved by putting existing money in a savings account also goes down, which reduces the opportunity cost of going ahead with the investment.