Interest Rate Effects on Borrowing, Investment, and GDP

Steps:

• Interest rates influence borrowing costs: lower rates make loans cheaper.
• Cheaper borrowing encourages firms and households to borrow more.
• Increased borrowing funds higher investment in capital and projects.
• Greater investment boosts aggregate demand, raising GDP.

Why D is correct:

• Lower interest rates decrease the cost of capital, stimulating borrowing and investment, which expands economic output per the IS-LM model.

Why the others are wrong:

• A: Higher rates reduce borrowing and investment, but sequence starts with higher rates correctly—effect on GDP is right, yet contradicts initial borrowing increase.
• B: Correctly links higher rates to decreased borrowing, investment, and GDP, but question seeks most likely overall sequence; B fits but D shows positive expansion.
• C: Lower rates should increase, not decrease, borrowing and investment.

Final answer: D