Explain how a fall in interest rates can affect total spending in the economy.

A fall in interest rates would mean it would be cheaper for consumers to borrow hence increasing the likelihood of consumers borrowing hence consumer spending would increase. Also, a fall in interest rates would discourage consumers from saving as much since they would get a lower return on their savings hence they would be more inclined to spend than to save. We must also look at the other aspects of aggregate demand when answering a question to do with the economy. Investment and government spending would also increase since firms and the government would also experience cheaper borrowing costs. One must however not forget that UK consumers have a high marginal propensity to import therefore cheaper borrowing and higher amounts of money to spend may lead to higher spending on imports therefore lowering the amount of exports bought and this would been there would be a large sum of income leaving the economy, increasing the trade deficit and lowering spending within the domestic economy. You could also examine the effect of lowering interest rates from the perspective of the increase in the money supply in the economy which would mean that the economy would be experiencing growth from the increase in aggregate demand and supply hence lowering the need for government spending for aspects like subsidies and increasing consumer spending. Overall make sure to examine the effects of a fall in interest rates using the components of aggregate demand and portray a balanced argument about the positive and negative effects on total spending.