Macroeconomic

  1. The central bank within the economy lifts interest rates

There is an increase in private domestic investment spending

An increase in international oil prices

A fall in real estate prices in the capital cities of the country 

2. Show all three channels by which changes in interest rates affect economic activity. Under what conditions might expansionary monetary policy that is lower interest rates might not greatly affect domestic economic activity?

Description

A lift of the interest rates means that the financing cost will rise and this will eventually lead to an increase on the cost of production. This pushes up the price level of the commodities and firms as well as the workers will be expecting it. This means that the short-run aggregate supply will move from point SRAS1 to SRAS2. At the same time the rise in interest rates will increase the firms’ cost as well a household borrowing, that will reduce investment spending and consumption. Hence, the demand curve will shift to the left from point AD1 to AD2.  However, change in interest rates is a variable that cannot lead to increase in potential GDP. Therefore, the long-run aggregate supply curve will not shift.