If the money supply is fixed,increases in the price level
A) raise the purchasing power of the money supply and increase the amount people spend.
B) reduce the average money cost of each transaction, thus lowering total spending.
C) reduce interest rates; thus, the cost of borrowing money falls, leading to more consumption and investment.
D) raise the incentive for people to spend on big-ticket items such as appliances, automobiles, and houses.
E) increase the size of the money balances people want in order to maintain the real value of their purchases, thus causing interest rates to rise.

Question

Quizplus · Accepted Answer

When the money supply is fixed and the price level increases, the real value of money decreases, meaning people need more money to maintain the same level of purchasing power for their transactions. This leads to an increase in the demand for money, which, in a fixed money supply scenario, causes interest rates to rise as people compete for the available money.

If the Money Supply Is Fixed,increases in the Price Level