Figure 10.1
-In Figure 10.1 if the interest rate, i, were to increase, then
A)money demand decreases and the price level increases.
B)money demand increases and the price level decreases.
C)the money supply and the price level would increase.
D)the money supply and the price level would decrease.

Question

Figure 10.1 
-In Figure 10.1 if the interest rate, i, were to increase, then
A)money demand decreases and the price level increases. 
B)money demand increases and the price level decreases. 
C)the money supply and the price level would increase. 
D)the money supply and the price level would decrease.

Quizplus · Accepted Answer

An increase in the interest rate makes holding money less attractive because the opportunity cost of holding money (foregone interest) increases. This leads to a decrease in money demand. As people try to hold less money, they spend more on goods and services, which can drive prices up, hence the price level increases.

Figure 10.1 -In Figure 10.1 If the Interest Rate, I, Were to I