According to the interest rate effect, an increase in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending.
A) increase; increases; decreases
B) decrease; increases; decreases
C) increase; decreases; decreases
D) decrease; decreases; increases

Question

Quizplus · Accepted Answer

The interest rate effect suggests that when the price level increases, people need to hold more money for transactions, which leads to an increase in the demand for money. As the demand for money increases, interest rates go up, making borrowing more expensive. This, in turn, leads to a decrease in investment spending.

According to the Interest Rate Effect, an Increase in the Price