Higher interest rates lead to reductions in the aggregate output due to ________.
A) reductions in autonomous consumer expenditure
B) reductions in planned investment expenditure
C) higher expected inflation
D) higher employment

Question

Quizplus · Accepted Answer

When interest rates are high, the cost of borrowing money for investment purposes increases. As a result, firms may reduce their planned investment expenditure, leading to a decrease in aggregate output. This is because investment is an important component of aggregate demand, and a decrease in investment will lead to a decrease in output. The other options (A, C, D) are not directly related to the effect of interest rates on aggregate output.

Higher Interest Rates Lead to Reductions in the Aggregate Output