An unexpected decrease in aggregate demand results in an increase in real interest rates in the short run.

Question

Quizplus · Accepted Answer

A decrease in aggregate demand leads to a decrease in output and employment. In response, central banks lower interest rates to stimulate economic growth. If there is an unexpected decrease in aggregate demand, the central bank may not adjust interest rates immediately, leading to an increase in real interest rates in the short run.

An Unexpected Decrease in Aggregate Demand Results in an Increase