The interest rate effect shows that if the price level increases
A) consumers and businesses will increase their spending to buy the same amount of goods as before to make up for the higher interest rates.
B) consumers and businesses will decrease their spending as the interest rate increases, thereby pushing up the cost of acquiring funds.
C) U.S. exports and imports will both decrease.
D) the real value of financial assets will increase.

Question

Quizplus · Accepted Answer

The interest rate effect states that as the price level increases, interest rates increase, leading to a decrease in consumer and business spending. Higher interest rates increase the cost of borrowing, making it less attractive for consumers and businesses to acquire funds. As a result, they reduce their spending, leading to a decrease in demand for goods and services. Hence, choice B is the correct answer.

The Interest Rate Effect Shows That If the Price Level