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.

Question

Quizplus · Accepted Answer

When interest rates fall, it becomes cheaper to borrow money. As a result, spending by consumers and businesses increases, leading to higher aggregate demand. This increase in aggregate demand will lead to a rise in both the equilibrium price level and the equilibrium level of GDP in the short run. Therefore, option A is correct.

Interest Rates in the Economy Have Fallen