Ceteris paribus,if average prices in the U.S.economy fall,then the
A)Real balances effect will lead to a lower quantity of U.S.output demanded.
B)Foreign trade effect will lead to a lower quantity of U.S.output demanded.
C)Interest rate effect will lead to a higher quantity of U.S.output demanded.
D)Cost effect will lead to a higher quantity of U.S.output demanded.

Question

Quizplus · Accepted Answer

The interest rate effect states that as the average prices in the economy fall, interest rates will tend to fall as well. This leads to lower borrowing costs for businesses and consumers, which in turn leads to increased consumption and investment. Therefore, the quantity of U.S. output demanded will increase.

Ceteris Paribus,if Average Prices in the U