Question

Suppose planned investment is completely insensitive to changes in the interest rate and also consumption does not depend on the interest rate. If interest rate is reduced, planned aggregate expenditure...

A) increases
B) decreases
C) remains unchanged
D) becomes negative

Answer 1

Planned aggregate expenditure increases when the interest rate is reduced as it becomes more attractive for businesses to borrow money for investment and for consumers to borrow for consumption.

Step-by-step explanation:

If the interest rate is reduced, planned aggregate expenditure increases. When the interest rate is lower, it becomes more attractive for businesses to borrow money for investment, leading to an increase in planned investment. Additionally, lower interest rates encourage consumer borrowing, which leads to an increase in consumption. Therefore, both components of planned aggregate expenditure, investment, and consumption, increase when the interest rate is reduced.