As the price level increases, consumers increase their borrowing in order to maintain purchasing power. As a result of this increased borrowing, the interest rate rises and investment falls. This is an example of:

Question

Quizplus · Accepted Answer

This scenario illustrates the interest rate effect, which is one of the three effects of changes in the price level on the economy. As the price level increases, consumers' borrowing increases, putting upward pressure on interest rates. This, in turn, causes a reduction in investment spending.

As the Price Level Increases, Consumers Increase Their Borrowing in Order