Which statement describes the interest-rate effect?
A) A higher price level leads to higher money demand, higher money demand leads to higher interest rates, and a higher interest rate increases the quantity of goods and services demanded.
B) A higher price level leads to higher money demand, higher money demand leads to lower interest rates, and a higher interest rate reduces the quantity of goods and services demanded.
C) A lower price level leads to lower money demand, lower money demand leads to higher interest rates, and a lower interest rate reduces the quantity of goods and services demanded.
D) A lower price level leads to lower money demand, lower money demand leads to lower interest rates, and a lower interest rate increases the quantity of goods and services demanded.

Question

Quizplus · Accepted Answer

The interest-rate effect suggests that a lower price level reduces the demand for money, which in turn leads to lower interest rates, encouraging more borrowing and spending, thereby increasing the quantity of goods and services demanded.

Which Statement Describes the Interest-Rate Effect