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Jesal Desai Barry Reeves Option B How does monetary policy affect affecting aggregate demand? The point of implementing policy through raising or lowering interest rates is to affect people's and firms' demand for goods and services. This section discusses how policy actions affect real interest rates, which in turn affect demand and ultimately output, employment, and inflation. What are real interest rates and why do they matter? For the most part, the demand for goods and services is not related to the market interest rates quoted on the financial pages of newspapers, known as nominal rates. Instead, it is related to real interest rates-that is, nominal interest rates minus the expected rate of inflation. How do real interest rates affect economic activity in the short run? Changes in real interest rates affect the public's demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households,...

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