Answer to Question #210374 in Macroeconomics for Sara khan

Question

Explain how the interest rate works in the classical system to stabilize aggregate demand in the face of autonomous changes in components of aggregate demand such as investment or government spending

Answer 1

The interest rate is determined by the amount of savings and investment in an economy. The interest rate affects the aggregate demand in that if the interest rate is high it will became more expensive to borrow money which causes the aggregate demand to decrease. If the interest rate in the classical system increases or decreases the economic activity will tend to be high or low which results to the decrease or increase in the aggregate demand.