The interest rate effect refers to the fact that we would expect individuals to consume less and save more when price levels rise.

Question

Quizplus · Accepted Answer

The interest rate effect actually refers to the change in investment and consumption as a result of changes in the interest rate that occur due to changes in the price level. When price levels rise, interest rates tend to increase, which can discourage borrowing for consumption and investment, leading to a decrease in aggregate demand. The statement incorrectly describes the interest rate effect as directly related to changes in consumption and saving due to price levels, rather than through changes in interest rates.

The Interest Rate Effect Refers to the Fact That We