Answer to Question #115261 in Macroeconomics for Jahana

Question

Suppose there is an increase in interest rate. By using the Aggregate Expenditure (AE) – Aggregate Output (Y) graph, show the effects of this change on AE and Y in the Short-Run. Then, show the effect of increased interest rate by using the IS curve, explain what will happen to the IS curve

Answer 1

Reasons for Aggregate Demand Shift include;

The interest rates decrease which causes the public to hold higher real balances. This stimulates aggregate demand, which increases the equilibrium level of income andspending. Likewise, if the monetary supplydecreases, the demand curve will shift to the left.