In the context of aggregate demand, the interest rate effect means that an increase in the average price level will lead to _____ in interest rates and _____ in investment spending.
A) an increase; a decrease
B) an increase; an increase
C) a decrease; a decrease
D) a decrease; an increase

Question

Quizplus · Accepted Answer

The interest rate effect suggests that as the average price level rises, people will need more money for transactions, leading to higher demand for money. This increased demand typically results in higher interest rates, which in turn discourages investment spending because borrowing costs are higher.

In the Context of Aggregate Demand, the Interest Rate Effect