Inflation Rates Edged Down in April

The real interest rate is the opportunity cost of borrowing to buy consumer goods and capital equipment. So higher interest rates raise the opportunity cost of borrowing, which decreases consumer spending and business investment.

Higher interest rates decrease consumption expenditure and investment, which are components of aggregate demand. Short-run aggregate supply changes when potential GDP changes or when the money prices of factors of production change, but none of these events that influence short-run aggregate supply are influenced by higher interest rates.