A loose or expansionary monetary policy, will tend to encourage company investment and consumer borrowing for expensive things because it will result in lower interest rates and a greater amount of loanable cash.
A number of aggregate demand components are impacted by monetary policy, which also has an impact on interest rates and the amount of loanable money. Two elements of aggregate demand will be decreased by a tight or contractionary monetary policy that results in higher interest rates and fewer loanable funds.
Because it is less desirable for businesses to borrow money, business investment will decrease. Even businesses that already have money will find that, with higher interest rates, it is relatively more desirable to invest in a financial asset than in physical capital. In addition, borrowing for expensive products like homes and cars will be less common due to rising interest rates.
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