Question 61

The aggregate demand curve shifts to the right when interest rates fall.

A decrease in interest rates typically leads to an increase in aggregate demand, as lower borrowing costs stimulate consumer spending and business investment. This increased spending causes the aggregate demand curve to shift to the right.

A) Shifts to the right

This option is correct because when interest rates fall, borrowing becomes less expensive, encouraging both consumers and businesses to spend more. This increase in overall spending leads to a rightward shift of the aggregate demand curve, reflecting higher demand at every price level.

B) Shifts to the left

This option is incorrect. A leftward shift in the aggregate demand curve would indicate a decrease in demand, which is contrary to the effects of falling interest rates. Lower interest rates generally do not discourage spending; rather, they promote it.

C) Bows outward

This option is incorrect. An outward bowing of the aggregate demand curve does not relate to interest rate changes. The shape of the curve typically reflects the relationship between price levels and quantity demanded, not the influence of interest rates.

D) Bows inward

This option is also incorrect. An inward bowing of the aggregate demand curve does not occur due to changes in interest rates. Interest rate decreases do not alter the fundamental shape of the demand curve but instead influence its position.

Conclusion

The correct answer is A) Shifts to the right, as falling interest rates stimulate consumer and business spending, resulting in higher aggregate demand. All other options fail to accurately represent the impact of interest rate changes on the aggregate demand curve, which consistently shifts rightward in response to lower borrowing costs.