Question : Assertion: An increase in the interest rate can lead to an increase in aggregate demand.

Reason: Higher interest rates incentivize saving, which increases the pool of funds available for borrowing and investment, leading to an increase in aggregate demand.

Option 1: Both Assertion and Reason are correct, and the Reason is the correct explanation of the Assertion.
 

Option 2: Both Assertion and Reason are correct, but the Reason is NOT the correct explanation of the Assertion.
 

Option 3: Assertion is correct, but the Reason is incorrect.

 

Option 4: Assertion is incorrect, but the reason is correct

Correct Answer: Assertion is correct, but the Reason is incorrect.

Solution : The correct answer is(C). Assertion is correct, but the Reason is incorrect.

Assertion is correct. When the interest rate increases, it becomes more expensive to borrow money. This discourages people from borrowing money for consumption, such as buying a new car or taking a vacation. Instead, people are more likely to save their money, which increases the pool of funds available for borrowing and investment. This can lead to an increase in aggregate demand, as businesses have more money to invest in new projects and consumers have more money to spend on goods and services.

Reason is incorrect. Higher interest rates do incentivize saving, but they also discourage investment. This is because higher interest rates make it more expensive for businesses to borrow money to invest in new projects. As a result, higher interest rates can lead to a decrease in aggregate demand, as businesses have less money to invest and consumers have less money to spend.

In conclusion, the assertion is correct, but the reason is incorrect. An increase in the interest rate can lead to an increase in aggregate demand, but it is not because higher interest rates incentivize saving. Instead, it is because higher interest rates discourage consumption and encourage investment.