Which statement best describes the interest-rate effect?
A) As the money supply increases, money demand decreases, the interest rate falls, so spending rises.
B) As the money supply increases, money demand decreases, the interest rate rises, so spending falls.
C) As the price level increases, money demand increases, the interest rate falls, so spending rises.
D) As the price level increases, money demand increases, the interest rate rises, so spending falls.

Question

Quizplus · Accepted Answer

The interest-rate effect describes how an increase in the price level leads to higher demand for money, which in turn increases interest rates and reduces spending.

Which Statement Best Describes the Interest-Rate Effect