Holding all other things constant, when the price level rises, interest rates:
A)rise and firms want to borrow more for new plants and equipment and households want to borrow less for homebuilding.
B)rise and firms will want to borrow less for new plants and equipment and households will want to borrow less for homebuilding.
C)fall and firms want to borrow more for new plants and equipment and households want to borrow more for homebuilding.
D)all of the above

Question

Holding all other things constant, when the price level rises, interest rates:
A)​rise and firms want to borrow more for new plants and equipment and households want to borrow less for homebuilding.
B)​rise and firms will want to borrow less for new plants and equipment and households will want to borrow less for homebuilding.
C)​fall and firms want to borrow more for new plants and equipment and households want to borrow more for homebuilding.
D)​all of the above

Quizplus · Accepted Answer

When the price level rises, interest rates increase. This is because the demand for loans increases as people need more money to maintain their standard of living, while the supply of loanable funds decreases as people invest in other assets that offer a higher return. As a result, firms will want to borrow less for new plants and equipment, and households will want to borrow less for home building.

Holding All Other Things Constant, When the Price Level Rises