In the analysis of the interest rate effect, when the price level changes, the quantity of money households and firms' want to hold and interest rates move in the ____ direction as the change in the price level, while investment and the quantity RGDP demanded move in the ____ direction as the change in the price level.
A)Same, same
B)Same, opposite
C)Opposite, same
D)opposite, opposite

Question

In the analysis of the interest rate effect, when the price level changes, the quantity of money households and firms' want to hold and interest rates move in the ____ direction as the change in the price level, while investment and the quantity RGDP demanded move in the ____ direction as the change in the price level.
A)​Same, same
B)​Same, opposite
C)​Opposite, same
D)​opposite, opposite

Quizplus · Accepted Answer

In the interest rate effect, when the price level increases, households and firms want to hold more money, which drives interest rates up. Higher interest rates reduce investment, leading to a decrease in the quantity of RGDP demanded. Thus, the quantity of money and interest rates move in the same direction as the change in the price level, while investment and the quantity of RGDP demanded move in the opposite direction.

In the Analysis of the Interest Rate Effect, When the Price