Most business borrow for financing their purchases of raw material and capital etc. Shouldn't a interest rate rise cause cost of production to increase, therefore shifting SRAS to left? Thanks in advance.

  • $\begingroup$ If economy activities are so easy, then there will be no derivative such as hedging, future buying, etc. $\endgroup$ – mootmoot Jul 5 '18 at 11:57

Yes, however a supply shift as a result of interest rates can be (sticky).this is why after a stock drop, a recession can take 1 year- 18 months to occur. So when we look at economic indicators over the past year, the 10-year approaching 3% has not led to a reduction in aggregate supply. It may not be until FY 18 Q4 that we see a drop a significant drop in in supply. Supply and interest rates do not have a “flexible” relationship, but instead a “sticky” one in which supply may not drop immediately, but over time your answer is correct.

  • $\begingroup$ But then why interest rates shift only aggregate demand to the left in AS-AD graph? $\endgroup$ – John Richard Apr 6 '18 at 13:40
  • $\begingroup$ Aggregate demand shifts left because the rise in interest rates in an economic model should decrease demand. The issue is that the shift in the real world is generally not immediate and can be “sticky” to shift aggresgrate demand lower. $\endgroup$ – Simeon Ikudabo Apr 7 '18 at 8:05

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