... Aggregate demand is made up of all demands or expenditures in the economy at any given price, and consumption is a major part of the equation; AD = C + I + G + (X-M) This means that a drop in interest rates will mean that a large number of people will be able to spend a lot more money per month on other forms of expenditure. This shows how an increase in consumption will shift aggregate demand to the right and thus prices will increase from P1 to P2. This can be shown in a more detailed way by looking at Monetarist Transmission Mechanism. This shows how an increase in the money supplied via a fall in interest rates will, in the short run lead to an increase in aggregate demand. ...

See this essay or coursework document in full right now