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MONETARY POLICY a. Use the basic AD/AS model to illustrate and explain the effect of a rise in interest rates on the economy.

MONETARY POLICY

a. Use the basic AD/AS model to illustrate and explain the effect of a rise in interest rates on the economy.

b. Discuss the possible effects an increase in interest rates will have on the following two components of aggregate demand: (i) consumption; and (ii) investment.

c. Interest rates are at their lowest levels in history in the advanced capitalist economies of Australia, Europe, Japan and the US. Will very low interest rates encourage firms to borrow large sums of money for major investments? In your answer, explain the important role of the state of expectations.

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