According to the intertemporal substitution effect, when the price level increases, the interest rate
A) rises and the quantity of real GDP demanded increases.
B) rises and the quantity of real GDP demanded decreases.
C) falls and the quantity of real GDP demanded decreases.
D) is not affected.

Question

Quizplus · Accepted Answer

The intertemporal substitution effect suggests that when the price level increases, the interest rate rises as people prefer to save rather than spend due to higher prices. This increase in interest rates discourages borrowing and spending, leading to a decrease in the quantity of real GDP demanded.

According to the Intertemporal Substitution Effect, When the Price Level