What is the relationship between higher interest rates and aggregate expenditure?
A)Higher interest rates lower consumption and investment but raise government expenditures and net exports, and thus they have an indeterminate effect on aggregate expenditure.
B)Higher interest rates boost aggregate expenditure.
C)Aggregate expenditures are determined independently from changes in real interest rates.
D)Higher interest rates cause aggregate expenditure to fall.

Question

Quizplus · Accepted Answer

Higher interest rates cause the cost of borrowing to increase, which discourages consumers and businesses from taking out loans to finance spending and investment. As a result, consumption and investment decrease, causing aggregate expenditure to fall.

What Is the Relationship Between Higher Interest Rates and Aggregate