What is the impact of lower interest rates on aggregate demand?

Lower interest rates have a significant impact on aggregate demand, primarily by stimulating investment and consumer spending. When interest rates decrease, borrowing costs are reduced for both consumers and businesses. For consumers, lower rates make loans for purchasing homes, cars, and other big-ticket items more affordable, encouraging increased spending. This additional consumer expenditure contributes positively to aggregate demand.

For businesses, lower interest rates make it less expensive to finance capital projects and invest in new equipment or expansion. This increased investment by businesses further boosts economic activity, as it can lead to more jobs and higher production levels. As a result, the overall demand across the economy increases when interest rates are lowered due to the combined effects of heightened consumer and business spending.

This dynamic is a crucial aspect of monetary policy, where central banks may lower interest rates during periods of economic slowdown to stimulate growth and increase aggregate demand.