When the price level falls, households and firms reduce their holdings of money, and shift their money into interest earning assets, which will increase the supply of loanable funds, leading to a lower interest rate and an increase in borrowing and an increase in RGDP demanded.

Question

Quizplus · Accepted Answer

When the price level falls, the demand for money decreases as households and firms need less money to purchase goods and services. As a result, they invest in interest-earning assets, increasing the supply of loanable funds. This increase in loanable funds leads to a lower interest rate and higher borrowing, resulting in an increase in real gross domestic product (RGDP) demanded.

When the Price Level Falls, Households and Firms Reduce Their