How does an increase in interest rates typically affect aggregate demand in an economy?

When interest rates increase, borrowing money becomes more expensive for both consumers and businesses. This means that people are less likely to take out loans to buy big-ticket items like houses or cars, and businesses may hold off on investing in new projects or equipment. As a result, overall spending in the economy declines, which reduces aggregate demand. For example, if a family decides not to buy a new home because of higher mortgage rates, the construction industry may see less demand for new houses, leading to a slowdown in economic activity. Therefore, higher interest rates can slow down economic growth by decreasing how much people and businesses spend.