Figure 21-3.
-Refer to Figure 21-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?
A)1, 2, 3, 4
B)1, 4, 3, 2
C)3, 4, 2, 1
D)3, 2, 1, 4

Question

Figure 21-3. 
-Refer to Figure 21-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?
A)1, 2, 3, 4 
B)1, 4, 3, 2 
C)3, 4, 2, 1 
D)3, 2, 1, 4

Quizplus · Accepted Answer

The interest-rate effect describes how changes in the interest rate affect the quantity of goods and services demanded in an economy. The sequence best representing this effect is as follows: 
1. A change in the money supply or the price level leads to a change in the interest rate. 
2. Changes in the interest rate affect borrowing costs and the opportunity cost of holding money. 
3. As interest rates rise, borrowing costs increase, causing a decrease in investment spending and consumption spending. 
4. A decrease in spending leads to a decrease in aggregate demand and a decrease in real GDP. Therefore, the correct sequence is 3, 2, 1, 4.

Figure 21-3. -Refer to Figure 21-3. Which of the Following Sequences (Numbered