Question

An increase in interest rates affects aggregate demand by
A. Shifting the aggregate demand curve to the right, increasing real GDP and lowering the price level
B. Shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level
C. Shifting the aggregate supply curve to the left, decreasing real GDP and increasing the price level

Answer 1

Answer:

Option (B) is correct.

Explanation:

When there is an increase in the interest rate then as a result this will shift the aggregate demand curve leftwards. This is because of the fall in one of the component of aggregate demand curve that is investment.

Increased interest rate will reduce the investment demand and hence shifts the aggregate demand curve rightwards. This increase in the interest rate will also increase the reserves of the banks.

When there is a leftward shift in the AD curve then as a result there is a fall in both real GDP and Price level in an economy.