Why does a lower interest rate increase aggregate demand?

A lower interest rate reduces the return on saving, and as such reduces the opportunity cost of spending - for the only alternative to spending is saving. This increases the incentive for consumers and institutions to consume/invest. Aggregate demand consists of the following elements: government spending, investment, consumption and net exports. Institutional spending (investment) and consumer spending (consumption) increase due to the added incentive to spend, thus increasing aggregate demand ceteris paribus.

JM

Related Economics A Level answers

All answers ▸

Examine the desirability of a fixed exchange rate regime amongst the world's major economies.


Comment on the long and short term cross-price elasticity of demand for petrol and diesel.


What is the impact of a price ceiling on a market equilibrium?


Discuss the impact that Brexit may upon the UK economy (25 marks)