When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the interest rate effect.
As productivity rises or the cost of essential inputs decreases, the aggregate supply curve shifts to the right, allowing for a combination of lower inflation, more production, and lower unemployment. Real GDP includes investment spending as a significant component. Investment spending on physical capital is not only typically the most volatile component of real GDP, but it also makes a significant contribution to economic expansion. Typically, businesses borrow that cash.
The borrowing process is described by the market for loanable funds. Savings are the source of the loanable funds available. It is predicated on borrowing that loanable funds are in demand. The real interest rate and the amount of loans made depend on how the supply of savings and the demand for loans interact.
To know more about interest rate effect, refer:
https://brainly.com/question/13322646
#SPJ4
