All else equal, if the price level in an economy increases, then the equilibrium interest rate will _____. In this case, the Federal Reserve can _____ the money supply to bring the interest rate back to its original level.

Question

Quizplus · Accepted Answer

When the price level in an economy increases, the demand for money also increases because people need more money to buy the same amount of goods and services. This increased demand for money leads to higher interest rates. To bring the interest rate back to its original level, the Federal Reserve can increase the money supply, making more money available and thus lowering the interest rate back to its initial position.

All Else Equal, If the Price Level in an Economy