Using the concept of the multiplier effect, evaluate the likely economic effects on the UK price level and the equilibrium levels of real output and rising interest rates?

The multiplier effect can be defined as an increase in a country’s supply of money from the banks’ ability to lend. An injection into the circular flow of income will most likely cause further rounds of re spending into the economy. The size of the multiplier effect depends on an assortment of facts from interest rates to the marginal propensity to consume. If the MPC consumers are more likely to re spend the money and put it back into the circular flow. This also includes investments by firms and spending on abroad imports. If interest rates are high consumers and firms are more likely to save their money as the return is very high, but if interest rates lower the opportunity cost of saving the money also lowers and firms/ consumers will inclined to spend in the economy.
Increased interest rates will potentially have several consequences, one of these being increased borrowing rates. If borrowing rates go up firms become less willing to take out money from the banks and invest, as the cost is too high. As investment from firms decrease there will be an inevitable decrease in capital good investment which will cause a leftward shift in aggregate demand. Subsequently the decrease in AD may also result in a lowering of inflation.
Price level
Price level
Increased interest would directly reduce inflation and slow down economic growth. As aforementioned, higher interest rates would increase consumer’s likelihood to save, resulting in a withdrawal from the circular flow. Savings increase and borrowing decreases affecting the aggregate demand and shifting AD to the left
LRAS
LRAS

P1
P1

AD1

AD1

P2
P2

AD2
AD2

Y2
Y2
Y1
Y1

The graph displays a fall in AD due to