When a change in the price level leads to a change in the interest rate and thus a change in the quantity of aggregate demand,it is called the:
A) interest rate effect.
B) wealth effect.
C) savings effect.
D) output effect.
E) price effect.

Question

Quizplus · Accepted Answer

The scenario described in the question is known as the interest rate effect. This is because when the price level changes, the demand for money changes, which in turn affects the interest rate. As the interest rate changes, it affects investment spending and consumption, thus changing the quantity of aggregate demand. The wealth effect refers to changes in consumption due to changes in wealth, savings effect refers to changes in savings due to changes in interest rates, output effect refers to changes in output due to changes in aggregate demand, and price effect usually refers to the impact of a change in the price of one good on the demand for other goods.

When a Change in the Price Level Leads to a Change