When total planned real expenditures change due to changes in the cost of borrowing that result from variations in the price level, this is known as the
A) interest rate effect.
B) real-balance effect.
C) open economy effect.
D) aggregate balances effect.

Question

Quizplus · Accepted Answer

This scenario is known as the interest rate effect. When the price level changes, the interest rates will also change, which will affect the level of planned expenditures in the economy. As interest rates increase, the cost of borrowing increases, which discourages borrowing and spending, leading to a decrease in planned expenditures. Conversely, when interest rates decrease, the cost of borrowing decreases, encouraging borrowing and spending, leading to an increase in planned expenditures.

When Total Planned Real Expenditures Change Due to Changes in the Cost