When a change in the price level leads to a change in the interest rate and thus a change in the quantity of aggregate demand,it is called the ________ effect.
A) interest rate
B) wealth
C) savings
D) output
E) price

Question

Quizplus · Accepted Answer

A change in the price level can affect interest rates through its impact on the demand for money. When prices rise, people need to hold more money to finance their purchases, leading them to demand more money. In turn, this increased demand for money pushes up the interest rate, as lenders can charge higher rates when demand is high. The higher interest rate then reduces the quantity of aggregate demand, as borrowing and investment become more expensive. This is known as the interest rate effect.

When a Change in the Price Level Leads to a Change