When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which in turn reduces consumption and investment spending. This argument is called the:
A) real balances effect.
B) interest-rate effect.
C) net exports effect.
D) substitution effect.

Question

Quizplus · Accepted Answer

This argument is known as the interest-rate effect, which states that as the price level increases, the demand for credit also increases, leading to higher interest rates. Higher interest rates, in turn, discourage both consumption and investment spending, which reduces the overall demand in the economy.

When the Supply of Credit Is Fixed, an Increase in the Price