ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.

Detailed explanation-2: -When interest rates rise, it becomes more “expensive” to borrow money. That borrowed money would typically go toward consumer expenditures and capital investment, and so these two sectors diminish under higher interest rates. Therefore aggregate demand decreases, per the equation.

Detailed explanation-3: -exchange rate effect (sometimes called the foreign purchases effect) when a change in the price level in one country leads to other countries purchasing more of that country’s goods. That makes net exports (and therefore real GDP) increase.

Detailed explanation-4: -Definition: The interest rate effect is changes experienced in macroeconomic indicators caused by an alteration in the interest rates. It can also refer to the modification in the interest rate originated by a change in the overall price level.