Higher interest rates curb inflation by reducing aggregate demand

Steps:

• Raising interest rates increases borrowing costs for consumers and businesses.
• This discourages spending on big-ticket items like homes and cars.
• Reduced spending lowers overall demand in the economy.
• Lower demand eases price pressures, controlling inflation.

Why A is correct:

• Higher interest rates raise the return on savings, incentivizing consumers to save more rather than spend, which directly reduces consumption and demand-pull inflation per basic macroeconomic theory.

Why the others are wrong:

• B: Higher rates increase government borrowing costs, typically constraining spending rather than increasing it.
• C: Higher rates make loans more expensive, discouraging investment spending by firms.
• D: Higher domestic rates attract foreign investment, strengthening the exchange rate rather than weakening it.

Final answer: A