Interest rates in the economy have risen.How will this affect aggregate demand and equilibrium in the short run?
A)Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
B)Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall.
C)Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
D)Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise.
E)Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will fall.

Question

Quizplus · Accepted Answer

When interest rates in the economy rise, it becomes more expensive for consumers and businesses to borrow money, which leads to a decrease in their spending. This decrease in spending leads to a decrease in aggregate demand. With a decrease in aggregate demand, the equilibrium price level and the equilibrium level of GDP will also fall in the short run.

Interest Rates in the Economy Have Risen