A rising aggregate price level _____ interest rates and therefore _____ output demanded.
A) increases; increases
B) increases; reduces
C) reduces; increases
D) reduces; reduces

Question

Quizplus · Accepted Answer

When the aggregate price level rises, inflation occurs, which reduces the purchasing power of money. As a result, people tend to save more money, and lenders increase their interest rates to recover the purchasing power that may be lost due to inflation. Therefore, firms would be discouraged from borrowing from banks due to higher interest rates, and investment spending would be reduced. Consequently, the demand for output decreases.

A Rising Aggregate Price Level _____ Interest Rates and Therefore