Community and Government

Interest Rate Effect: Definition, Examples, and Relation to Aggregate Demand

Written by MasterClass

Last updated: Oct 12, 2022 • 4 min read

From time to time, government bodies that set monetary policy (such as the United States Federal Reserve, also known as the Fed) will adjust national interest rates as they work toward a goal of sustained economic growth. When interest rates are adjusted, banks, consumers, and borrowers may alter their behavior in response. The way that rate adjustments motivate such behavior is known as the interest rate effect.