What impact would decreased interest rates have on aggregate demand?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Lower interest rates would, all other things being equal, lead to an increase in aggregate demand.  The reason for this is that lower interest rates essentially make it easier for people to borrow money.

When people want to buy large items, they typically have to borrow money to pay for those items.  They borrow money to buy houses or cars or even smaller things such as washing machines.  The more that people buy of these sorts of things, the higher aggregate demand is. 

When interest rates are low, it is cheaper to borrow money.  The interest rate is, essentially, the price of borrowing money.  Therefore, a lower interest rate means more money will be borrowed.  When more money is borrowed, more of these expensive items will be purchased.  This will lead to an increase in aggregate demand.


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