Macro Foundations · intro
What moves on the Aggregate Supply – Aggregate Demand diagram
Higher rates raise the cost of borrowing, cutting interest-sensitive spending, which shifts AD left.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The central bank raises interest rates to cool the economy.
Borrowing becomes more expensive; consumption and investment fall at every price level. AD shifts left.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: lower output and a lower price level (disinflationary pressure).
Examiners ask this as: interest rate hike, monetary tightening, fed raises rates, rba hikes, higher cash rate.
Other scenarios on Aggregate Supply – Aggregate Demand