Suppose the economy was in long-run equilibrium when there is a sudden increase in interest rates. What happens in the short run after the increase in the interest rates?
A) Both the price level and real GDP rise.
B) The price level falls and real GDP does not change.
C) The price level does not change and real GDP falls.
D) Both the price level and real GDP fall.

Question

Quizplus · Accepted Answer

An increase in interest rates typically leads to a decrease in investment and consumer spending due to the higher cost of borrowing. This decrease in spending leads to a fall in aggregate demand, which in turn causes both the price level and real GDP to fall in the short run.

Suppose the Economy Was in Long-Run Equilibrium When There Is