According to the interest rate effect, as the price level decreases, households and firms' holdings of money ____, interest rates ____, investments ____, and the quantity RGDP demanded ____.
A)increases, decrease, increase, decreases
B)increases, increase, increase, decreases
C)decreases, decrease, increase, increases
D)increases, increase, decrease, decreases

Question

According to the interest rate effect, as the price level decreases, households and firms' holdings of money ____, interest rates ____, investments ____, and the quantity RGDP demanded ____.
A)​increases, decrease, increase, decreases
B)​increases, increase, increase, decreases
C)​decreases, decrease, increase, increases
D)​increases, increase, decrease, decreases

Quizplus · Accepted Answer

According to the interest rate effect, as the price level decreases, households and firms will have more money, which leads to a decrease in interest rates. Decreased interest rates encourage more investment spending, which leads to an increase in RGDP demanded. Therefore, C is the correct answer as it shows that the price level decreasing leads to a decrease in holdings of money, a decrease in interest rates, an increase in investments, and an increase in the quantity RGDP demanded.

According to the Interest Rate Effect, as the Price Level