According to the intertemporal substitution effect, when the price level increases, the interest rate
A) is not affected.
B) rises and the quantity of real GDP demanded increases.
C) falls and the quantity of real GDP demanded decreases.
D) rises and the quantity of real GDP demanded decreases.

Question

Quizplus · Accepted Answer

According to the intertemporal substitution effect, when the price level increases, the interest rate rises as consumers will demand a higher return on their savings to maintain their standard of living. This increase in interest rates causes a decrease in the quantity of real GDP demanded, as borrowing and investment become more expensive. Therefore, option D is the correct choice.

According to the Intertemporal Substitution Effect, When the Price Level