Holding all other things constant, when the price level rises, interest rates:
A)rise, firms want to borrow more for new plants and equipment, and households want to borrow less for homebuilding.
B)rise, firms want to borrow less for new plants and equipment, and households want to borrow less for homebuilding.
C)fall, firms want to borrow more for new plants and equipment, and households want to borrow more for homebuilding.
D)fall, firms want to borrow less for new plants and equipment, and households want to borrow more for homebuilding.
E)remain unaffected and firms borrow the same amount for new plants and equipment but households borrow less for homebuilding.

Question

Quizplus · Accepted Answer

When the price level rises, interest rates generally increase as a response to the higher demand for money and credit. Higher interest rates make borrowing more expensive, leading both firms and households to borrow less. Firms may reduce borrowing for new plants and equipment due to the higher cost of financing, and households may cut back on borrowing for homebuilding for similar reasons.

Holding All Other Things Constant, When the Price Level Rises