An increase in the price level:
A)increases the purchasing power of money, leading to lower interest rates, which increases investment.
B)increases the purchasing power of money, leading to higher interest rates, which decreases investment.
C)decreases the purchasing power of money, leading to lower interest rates, which increases investment.
D)decreases the purchasing power of money, leading to higher interest rates, which decreases investment.

Question

Quizplus · Accepted Answer

An increase in the price level decreases the purchasing power of money. This often leads to higher interest rates as lenders demand more return to compensate for the reduced value of money over time, which in turn can decrease investment because borrowing becomes more expensive.

An Increase in the Price Level