Answer:
Changes in the equilibrium interest rate
- affects both the size of the domestic output and the allocation of capital goods among industries.
Explanation:
Changes in interest rates affects the demand for goods and services and, thus, aggregate investment spending. A decrease in interest rates lowers the cost of borrowing, which encourages industries to increase investment spending.
The aggregate demand is determined by consumption demand and investment demand. When the rate of interest falls the level of investment increases and vice versa
An increase in the equilibrium interest rate affects demand for money. This increase in demand raises the equilibrium interest rate.
Households and businesses then try to decrease their cash holdings by purchasing bonds affecting both the size of the domestic output and the allocation of capital goods among industries.
The equilibrium interest rate changes with the economy and monetary policy.
