According to the interest rate effect, a higher price level implies a _____ demand for money, which leads to a _____ interest rate and a lower planned investment spending.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question

Quizplus · Accepted Answer

The interest rate effect suggests that a higher price level increases the demand for money. As people and businesses need more money to handle their transactions, this increased demand for money leads to higher interest rates. Higher interest rates, in turn, make borrowing more expensive, which typically reduces the amount of planned investment spending.

According to the Interest Rate Effect, a Higher Price Level