Figure 16-3.

-Refer to Figure 16-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?
A) 1, 2, 3, 4
B) 1, 4, 3, 2
C) 3, 4, 2, 1
D) 3, 2, 1, 4

Question

Figure 16-3.
 
-Refer to Figure 16-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?
A) 1, 2, 3, 4 
B) 1, 4, 3, 2 
C) 3, 4, 2, 1 
D) 3, 2, 1, 4

Quizplus · Accepted Answer

The interest-rate effect occurs in response to a change in the price level. When the price level increases, people need to hold more money to make purchases, so the demand for money increases, raising the interest rate. This is shown by the sequence of arrows: 3 (price level increase) → 2 (more demand for money) → 1 (increase in interest rate) → 4 (lower consumption and investment). Therefore, the correct sequence is D) 3, 2, 1, 4.

Figure 16-3. -Refer to Figure 16-3. Which of the Following Sequences (Numbered