Macro Foundations · intro
What moves on the Aggregate Supply – Aggregate Demand diagram
Lower rates reduce the cost of borrowing, raising interest-sensitive spending (C and I), which shifts AD right.
The economy starts at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. where AD meets SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky..
The central bank lowers interest rates, making borrowing cheaper for households and firms.
Consumption and investment rise at every price level. AD shifts right.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: higher output and a higher price level.
Examiners ask this as: interest rate cut, monetary easing, fed cuts rates, rba cuts, lower cash rate.
Other scenarios on Aggregate Supply – Aggregate Demand