When a higher price level generates an increase in the interest rate that induces consumers to borrow less and buy less, this chain of events is referred to as
A) the real-balance effect.
B) the interest rate effect.
C) the open economy effect.
D) the price level effect.

Question

Quizplus · Accepted Answer

This is referred to as the interest rate effect, as a higher price level leads to an increase in interest rates, which in turn reduces borrowing and spending by consumers. The real-balance effect refers to the impact of price levels on the purchasing power of consumers' wealth, while the open economy effect refers to the impact of international trade on the domestic economy. The price level effect is a broader term that encompasses the various impacts of changes in the price level on the economy.

When a Higher Price Level Generates an Increase in the Interest