How does an increase in aggregate demand typically affect interest rates and bond prices?

When aggregate demand in an economy increases, it usually leads to higher spending by consumers and businesses. This increased demand can cause the economy to grow, which may lead to higher inflation expectations. As a result, lenders might raise interest rates to compensate for the risk of inflation, making borrowing more expensive. When interest rates go up, the prices of existing bonds typically fall because new bonds are issued with higher rates, making the older ones less attractive. For example, if a new bond offers a 5% interest rate, but you have an older bond that pays only 3%, people would prefer the new bond, causing the price of the older bond to drop.