Keynes's interest-rate effect implies that a lower price level:
A)reduces the interest rate and reduces the quantity of goods and services demanded
B)reduces the interest rate and increases the quantity of goods and services demanded
C)increases the interest rate and increases the quantity of goods and services demanded
D)increases the interest rate and reduces the quantity of goods and services demanded

Question

Quizplus · Accepted Answer

The interest-rate effect in Keynesian economics suggests that a decrease in the price level would lead to a decrease in the interest rate. When the price level decreases, people tend to have more money. As they start depositing money into banks or financial institutions, these institutions become awash with funds. In such a scenario, financial institutions decrease their interest rates to attract borrowers. This decrease in interest rates makes borrowing cheaper and leads to an increase in the demand for goods and services, thereby increasing the quantity of goods and services demanded.

Keynes's Interest-Rate Effect Implies That a Lower Price Level