A government decides to lower interest rates significantly to stimulate economic growth. In the short term, what is the most likely effect of this decision on investment spending and aggregate demand, and what long-term consequences could arise from sustained low interest rates?

When a government lowers interest rates, borrowing money becomes cheaper for businesses and individuals. This means that more people are likely to take out loans to invest in new projects, buy homes, or start businesses, which increases investment spending. As a result, aggregate demand rises because more money is being spent in the economy, leading to potential job creation and economic growth. For example, a small business might take a loan to expand its operations, hire more employees, and purchase more supplies, which all contribute to increased economic activity. However, if interest rates remain low for a long time, it could lead to inflation, where prices rise too quickly, and it might also encourage excessive borrowing, which could create financial instability in the future.