When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the
A) interest rate effect.
B) real balance effect.
C) investment effect.
D) disinvestment effect.

Question

Quizplus · Accepted Answer

The interest rate effect describes how an increase in prices leads to higher interest rates, which in turn discourages consumption and investment due to the reduced supply of loanable funds.

When Prices Rise, Consumers and Businesses Hold Larger Money Balances