If the general price level rises, given the money stock, we would expect:
A) aggregate real income to rise.
B) the rate of interest to fall since it is the cost of money.
C) the rate of interest to rise and interest sensitive expenditure to fall.
D) aggregate demand to increase.

Question

Quizplus · Accepted Answer

When the general price level rises, the purchasing power of money decreases, leading to a higher demand for money to conduct transactions. This increased demand for money, given a fixed money stock, typically leads to higher interest rates as people and businesses compete for the available funds. Higher interest rates, in turn, make borrowing more expensive, which can reduce interest-sensitive expenditures such as investments and big-ticket consumer purchases.

If the General Price Level Rises, Given the Money Stock