An increase in the price level results in a decline in aggregate demand because higher prices will cause the nominal interest rates to increase and GDP to drop. This effect is called the:
A) wealth effect.
B) trade effect.
C) income effect.
D) interest rate effect.

Question

Quizplus · Accepted Answer

An increase in the price level results in a higher nominal interest rate, which decreases investment spending and reduces consumption spending. This decline in spending causes a drop in GDP, leading to a decline in aggregate demand. This phenomenon is known as the interest rate effect.

An Increase in the Price Level Results in a Decline