Assume interest rates in the economy have fallen.How will this affect aggregate demand and equilibrium in the short run?
A)Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
B)Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise.
C)Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
D)Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall.
E)Aggregate demand will rise; the equilibrium price level will rise, and potential GDP will fall.

Question

Quizplus · Accepted Answer

When interest rates fall, it becomes cheaper for firms to borrow, leading to an increase in investment and consumer spending. This increase in spending will cause aggregate demand to rise. As a result, the equilibrium price level will rise, and the equilibrium level of GDP will rise as well. This is because the increase in aggregate demand leads to an increase in output and employment in the short run.

Assume Interest Rates in the Economy Have Fallen