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

Question

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

Quizplus · Accepted Answer

When the price level falls, the real value of money increases, leading to lower interest rates. Lower interest rates make borrowing cheaper, encouraging both firms to invest in new plants and equipment and households to borrow more for homebuilding.

Holding All Other Things Constant, When the Price Level Falls