What is a typical consequence of higher interest rates on aggregate demand?

Higher interest rates typically lead to a decrease in aggregate demand due to the increased cost of borrowing. When interest rates rise, consumers are less likely to take out loans for big-ticket items like houses and cars because the higher rates make monthly payments more expensive. This reduction in consumer spending is a significant component of aggregate demand.

Additionally, businesses face higher costs when financing investments through loans at increased interest rates. This can lead to a slowdown in capital investment, as the cost of borrowing may outweigh the expected returns on investing in new projects or expanding operations. As both consumer spending and business investment decline, aggregate demand decreases overall.

Moreover, higher interest rates can strengthen the national currency, making exports more expensive for foreign buyers, which may further dampen demand from international markets. In summary, higher interest rates discourage consumption and investment, leading to a decrease in aggregate demand within the economy.