According to the intertemporal substitution effect, a fall in the price level will
A) increase the real value of wealth, which causes interest rates to increase. As a result, the quantity of real GDP demanded decreases.
B) decrease the real value of wealth, which causes the quantity of real GDP demanded to increase.
C) cause the interest rate to fall. As a result, investment increases and the quantity of real GDP demanded increases.
D) lead to an increase in net exports, which causes the quantity of real GDP demanded to increase.

Question

Quizplus · Accepted Answer

A fall in the price level typically leads to a decrease in interest rates, encouraging more investment and increasing the quantity of real GDP demanded.

According to the Intertemporal Substitution Effect, a Fall in the Price