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.

Answered by Joseph M. Economics tutor

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