If aggregate demand increases significantly, what is the expected effect on nominal interest rates, and what is the underlying cause of this relationship?

When aggregate demand increases significantly, it usually leads to higher nominal interest rates. This happens because as more people and businesses want to buy goods and services, the overall demand in the economy rises. To keep up with this demand, businesses may need to borrow more money for investments, which increases the demand for loans. When more people want to borrow money, banks can raise interest rates since they have more customers competing for loans. For example, if a new technology boom causes many companies to invest heavily, the increased borrowing can push up interest rates as banks respond to the higher demand for credit.