- Messages
- 134
- Reaction score
- 72
- Points
- 38
NI will fall which will decrease the transactionary and precautionary demand , so it will push the interest further down But it will in the long runincrease in interest will reduce iinvestment by firms and consumption on large scale purchases by households. Aggregate demand will shift to the left and prices will fall.
Those who have borrowed money will have to now pay more interest, thus they will cut back on spending and so prices will fall.
Hot money will flow into the economy which appreciates the currency.exports become expensive and so it will fall, AD falls and price falls.but ofcourse this depends on elasticity.
However when price falls valu of money increases and so people will demand for less money.when demand for money falls,according to keynesians, interest rate will fall.this can lead to inflation later on.