A-A* (AO3/4) - The Future of Interest Rates
Economics: Edexcel A A Level, topic 4.1.4
If there is a reduction in the base rate (interest rate set by the central bank), then the interest rate that businesses and businesses borrow at should fall.
Rightward shift in AD
- After a cut in the bank rate:
- Businesses will borrow from banks at a lower interest rate.
- Households on floating rate or tracker mortgages will pay a lower interest payment on their debt each month.
Test yourself on A-A* (AO3/4) - The Future of Interest Rates
Why are negative interest rates unlikely to work in the traditional currency system?