Interest rate effect is one of the explanations of a downward aggregate demand curve.
A lower price level lowers the demand for money, because less money is required to buy a given quantity of goods. A lower price level thus reduces the price of money, that is the interest rates. Lower interest rates make borrowing by firms to build factories or buy equipment and other capital more attractive. A lower interest rate means lower mortgage payments, which tends to increase investment in residential houses. Investment thus rises when the price level falls. The tendency for a change in the price level to affect the interest rate and thus to affect the quantity of investment demanded is thus called the interest rate effect.