The increase in spending that occurs because the demand for investment goods increases when the price level falls is known as the
A) interest rate effect.
B) international trade effect.
C) price effect.
D) wealth effect.

Question

Quizplus · Accepted Answer

The interest rate effect explains how a decrease in the price level leads to lower interest rates, which in turn increases the demand for investment goods. This is because lower prices reduce the demand for money, leading to lower interest rates and making borrowing cheaper for investment purposes.

The Increase in Spending That Occurs Because the Demand for Investment