Macroecoeconomics Hw help plz? (10pts!!?)?

Question

How does an increase in interest rates affect aggregate demand? Briefly discuss how each component of aggregate demand is affected.

I always give best answer

Answer 1

Higher interest rates makes funds less available for investments/credits, etc. - thus increase in interest rates leads to fall in AD (though depends on cases of such increase, because it may be due to higher demand for funds).

Higher interest rates negatively affects consumption (less credits, more money stored in banks rather than spent for goods and services, etc.).

Higher interest rates negatively affects investments because it now required higher rate of return to pay for borrowed money and some investment projects become unprofitable.

Government - mostly assumed as unaffected, bot small residual is negatively affected too.

Net Export - tends to fall from surplus to trade deficit - because of higher interest rates there is trend of capital inflows.