According to the interest rate effect, a decrease 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 states that a decrease in the price level leads people to decrease their money holdings because they need less money to buy goods and services. This increases the supply of loanable funds, which decreases interest rates, thereby increasing investment spending.

According to the Interest Rate Effect, a Decrease in the Price