Which of the following statements is true about the interest rate effect?
A) The interest rate effect is why the aggregate demand curve is upward sloping.
B) A lower price level lowers the interest rate, which causes businesses and consumers to increase their desired spending.
C) A higher price level lowers the interest rate, which causes business and consumers to increase their desired spending.
D) Expenditures will change as a result of a change in the real value of money balances when there is a change in the price level.

Question

Quizplus · Accepted Answer

The interest rate effect is the idea that when the price level decreases, the interest rate decreases which encourages more borrowing and spending by both consumers and businesses. This leads to an increase in aggregate demand. Option A is incorrect because the interest rate effect is not the only reason why the aggregate demand curve is upward sloping. Option C is incorrect because a higher price level leads to an increase in the interest rate, which discourages borrowing and spending. Option D is also incorrect as it describes the wealth effect, not the interest rate effect.

Which of the Following Statements Is True About the Interest