Through the domestic monetary transmission mechanism, higher interest rates cause

Question

Quizplus · Accepted Answer

Higher interest rates cause a decrease in consumer and investment spending, as people are deterred from borrowing and spending due to the increased cost of borrowing. This leads to decreased aggregate demand and a decrease in real GDP. Additionally, higher interest rates attract foreign investment, causing an appreciation in the exchange rate and making exports more expensive, which also decreases aggregate demand. The decreased aggregate demand can lead to firms cutting back on production, which can lead to higher unemployment. Thus, higher interest rates cause a decrease in real GDP and an increase in unemployment.

Through the Domestic Monetary Transmission Mechanism, Higher Interest Rates Cause