AS Model answer: Examine the impact of a cut in interest rates

Using an AD/AS diagram examine the impact of a cut in interest rates

A decrease in interest rates may cause a fall in the cost of borrowing for many consumers and firms across the UK, as well as discourage savings (1m); this may result in a rise in Consumption and Investment (1 mark) causing AD to shift RIGHT (1m). The consequence of this is some firms may expand as they become more profitable when faced with more customers and orders for new technology from other firms, (1mark) resulting in RECOVERY, a quarterly rise in Real GDP after a recession (Y1-Y2) (1m) 

4 marks diagram

4 marks - explain a impact of cut in interest rates

4 marks evaluate

However the size of the recovery may not be that significant if the fall in interest rates is not that SIGNIFICANT  (2e) or long lasting as demand pull inflationary pressures (P1-P2) rise forcing the Bank of England to increase interest rates (MAGNITUDE/SCALE)(2e).