How can I use a graph to show the effects of a negative change in interest rates on GDP?
First one must understand the effects of a change interest rates has, If interest rates fall, we would likely see an increase in levels of consumption as people do not receive such a great return from interest if they just save their money in banks accounts - this makes it more worth while to spend. levels of investment are also likely to increase due to the fact that there is now a lower rate of return and the cost of servicing these debts decrease. In addition to this, people are more likely to borrow money to consume durables, for example, cars or washing machines In the UK, investment comprises 15% of aggregate demand and consumption equates to 65%. thus if these were to increase the A.D. curve on a graph would have to move outwards to A.D.1, to signify the growth - remember one should also draw an arrow to make it clear to the examiner which way the curve has moved. Also you should draw a dashed line to either axis from the new equilibrium to show the change in Price Level and also National Income.
