According to the interest rate effect, an increase in the price level, if other factors are held constant, will lead to
A) a reduction in total real spending on interest-rate-sensitive goods.
B) an increase in the stock of real wealth held by the public.
C) an outward shift of the aggregate demand curve.
D) an increase in the real interest rate.

Question

Quizplus · Accepted Answer

An increase in the price level leads to higher demand for money, which raises interest rates, reducing spending on interest-rate-sensitive goods like investments and durable goods.

According to the Interest Rate Effect, an Increase in the Price