All else equal, if the price level in the U.S economy increases, the equilibrium interest rate will _____. In this case, the Federal Reserve can _____ Treasury securities to bring the interest rate back to its original level.

Question

Quizplus · Accepted Answer

When the price level in the U.S. economy increases, it leads to a decrease in the real value of money, prompting people to demand more money for transactions. This increased demand for money raises the equilibrium interest rate. To counteract this and bring the interest rate back to its original level, the Federal Reserve can buy Treasury securities, which increases the money supply and lowers the interest rate.

All Else Equal, If the Price Level in the U