What effect does a decrease in interest rates generally have on aggregate demand?

A decrease in interest rates generally leads to an increase in aggregate demand because lower interest rates make borrowing cheaper for consumers and businesses. When interest rates decline, it becomes more affordable for consumers to take out loans for big purchases, such as houses and cars. This boost in consumer spending directly contributes to higher overall demand for goods and services.

Additionally, businesses face lower borrowing costs for financing investments in machinery, technology, and expansion projects. As businesses invest more, this also increases production capacity and employment, further stimulating aggregate demand through increased consumer spending from higher employment levels and wages.

Moreover, when interest rates fall, existing borrowers may benefit from reduced repayments on variable-rate loans, which can increase disposable income and consumption. Overall, the decrease in interest rates stimulates economic activity by encouraging both consumer spending and business investment, leading to an upward shift in aggregate demand.