Answer: Low interest rates encourage consumers to borrow and spend, while high interest rates encourage saving.
When interest rates are lower, people will find it cheaper to borrow and spend. Firms also borrow to invest in expansion plans.
When interest rates are low, the incentive to save is low and so consumers will choose to spend more.
A fall interest rates will increase the demand for real assets, which in turn will increase the prices. This will result in an increase in wealth and spur more consumption.
A fall in interest rates results in a depreciation in the value of the home currency, this results in making exports more competitive and imports cheaper.
Thus lower interest rates in the economy result in an increase in Aggregate Demand.
On the contrary, higher interest rates encourage savings, result in a decrease in investments by businesses, reduce the demand for real assets and causes a fall in the real asset prices, results in an appreciation of the currency and render exports uncompetitive and imports more expensive.
