Explain what happens to aggregate demand in the following cases?

Question

a. interest rates rise

b. the dollar depreciates relative to foreign currencies

Answer 1

a. interest rates rise

Aggregate demand will shift left - people will invest less (and part of consumption financed by borrowing will fall too)

b. the dollar depreciates relative to foreign currencies

Since purchasing power of income falls it means that for real economy aggregate demand shifts left - due to fall in real income.