The interest rate effect helps to explain why:
A)an increase in the price level reduces the quantity of aggregate demand.
B)an increase in the price level raises investment.
C)a decrease in the price level reduces the quantity of aggregate demand.
D)a decrease in the price level reduces investment.

Question

Quizplus · Accepted Answer

The interest rate effect explains that an increase in the price level leads to higher interest rates, which in turn reduces the quantity of goods and services demanded because higher interest rates make borrowing more expensive, thereby reducing spending on investment and consumption.

The Interest Rate Effect Helps to Explain Why