Question

Suppose that the U.S. government deficit​ decreases, causing interest rates in the United States to fall relative to those in the European Union. Assuming all else remains​ constant, how would this be​ represented?
A. Demand would increase and the economy from A to B.
B. Supply would drease and, demand would decrease, and the economy moves from B to C to D.
C. Demand would decrease and the economy moves from B to A.
D. Supply would increase demand would decrease, and the economy moves from C to B to A.

Answer 1

Answer:

A) Demand would increase

Explanation:

Interest rates and demand are inversely related, that is to say, if interest rates rise, demand decreases, and if interest rates go down, demand goes up.

The reason for this is that a lower interest rate means that loans are cheaper. As loans are cheaper, investments increase, and more investment means more aggregate demand because investment is one of its components.