Which of the following best describes the interest rate effect? As the price level rises:

Question

Quizplus · Accepted Answer

The interest rate effect is a concept in macroeconomics that describes how changes in the price level affect borrowing and lending decisions. As the price level rises, the demand for money increases, which causes interest rates to rise. Higher interest rates make borrowing more expensive, which in turn reduces investment spending. Therefore, option A is the correct choice. Option B is incorrect because it describes the income effect, not the interest rate effect. Option C is incorrect because it describes the wealth effect, not the interest rate effect. Option D is incorrect because it suggests that the Fed raises interest rates in response to rising prices, which is not always the case.

Which of the Following Best Describes the Interest Rate Effect