Home / Summaries / Macroeconomics Canadian Edition / money-aggregate-interest

3 good questions and answers about "the Interest rate effect"

Who are the two components that the interest rate effect directly affected by?

The consumers: by deciding whether to hold money
the investors: by deciding whether to borrow money

What effects does the increase in aggregate price level have of the consumer purchasing power of a given amount of money holdings? what effects does this have on the interest rates?

an increase in aggregate price level reduces the consumer purchasing power of a given amount of money holdings
the more money people hold the less funds available, so the interest rate increases.

How does a rise in interest rate affect effect the planned investment.

When people hold more money the save less
when they save less the supply of money decreases
when the supply of money decreases the price of money, the interest rate increases.
when the interest rate increases, the demand for money decreases and investors a not willing to invest as much
when investment decreases aggregate expenditure decreases, and planned aggregate expenditure decreases
when planned aggregate expenditure decreases the aggregate demand shifts to the left