AP MacroeconomicsAggregate Demand & Supply
Interest Rate Effect
The interest rate effect is the change in investment that results from a change in the interest rate due to a change in the price level.
When the price level rises, people need more money to buy goods and services. This increases the demand for money, which leads to an increase in the interest rate. Higher interest rates discourage borrowing and investment, leading to a decrease in aggregate demand. Conversely, when the price level falls, the interest rate decreases, leading to an increase in investment and aggregate demand.
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