What happens if the interest rate increases?

Question

what happens to business spending, aggregate supply, aggregate demand, output, employment, price level when the interest rate increases??

Thanks.

Answer 1

well....if interest rates go up...

-that means there is a reduction in money supply, therefore tightening credit conditions

-with tight credit conditions, reduces investment and other interest-sensitive items of spending

-reduces AD, income, output, jobs and, inflation(?)

Answer 2

Well, let's just say that when the interest rate goes up we will be seeing a depression.

(The Fed is waiting on the election)

Answer 3

if the interest increased with a good rate ?

i would liquidize all my assets and put my money in a bank...

Answer 4

The Cost of Money Increases. Thus making it expensive to obtain a loan. Which means housing suffers, auto sales suffer, business investments suffer. All that translates into few jobs, layoffs, and a cycle that begins feeding on itself. The end result is a slower economy. The plus is a stronger dollar.

Answer 5

according to the definition interest rate is the price of hiring money , therefore if interest rate raises the first immediate impact will be on the price level so the first result is inflation , aggregate supply will increase becasue now producers will sell their products and services at higher prices, aggregate demand will boost since aggregate demand is the same as Nominal GDP so if we do not discount GDP by inflation we are looking at aggregate demand which as a result of higher price level has increased as well, but at the same time a component of aggregate demand so called investment will decrease because borrowing will take place at higher places (due to higher interest rate ) so borrowing for investment activities declines, the outcome on employment is ambiguous and it depends on the crowing out in investment has greater impact on labour market negatively or increasing in GDP has a positive impact on labour market

Answer 6

when the interest rate increases, the "price" of money increases. A higher price level will cause an increase in the interest rate, meaning that there will be a decrease in borrowing used for consumption and investment.  This means that aggregate demand decreases. Much of the expenditure funded by businesses is through borrowing and when the interest rate rises and the cost of borrowing these funds rises, thereby discouraging business investment.