When prices rise, the interest rate:
A) also tends to rise.
B) tends to fall.
C) is usually not affected.
D) will rise if the wealth effect outweighs the price effect.

Question

Quizplus · Accepted Answer

When prices rise, it can lead to inflation which reduces the purchasing power of money. To combat this, central banks tend to increase interest rates to make borrowing more expensive and reduce spending, thereby decreasing pressure on prices. Therefore, rising prices are associated with rising interest rates.

When Prices Rise, the Interest Rate