When the price level increases, ceteris paribus, it causes households and firms to try to

Question

Quizplus · Accepted Answer

When the price level increases, households and firms need more money to purchase the same amount of goods and services. As a result, they will increase their demand for money balances, causing an increase in interest rates. Therefore, the correct answer is D, which states that households and firms will try to increase money balances, which drives interest rates up.

When the Price Level Increases, Ceteris Paribus, It Causes Households