Interest rates in the economy have risen.How will this affect aggregate demand and equilibrium in the short run?
A)Aggregate demand will fall,the equilibrium price level will fall,and the equilibrium level of GDP will fall.
B)Aggregate demand will fall,the equilibrium price level will rise,and the equilibrium level of GDP will fall.
C)Aggregate demand will rise,the equilibrium price level will rise,and the equilibrium level of GDP will rise.
D)Aggregate demand will rise,the equilibrium price level will fall,and the equilibrium level of GDP will rise.

Question

Quizplus · Accepted Answer

When interest rates rise, it becomes more expensive to borrow money for investment and consumption purposes. This leads to a decrease in aggregate demand as consumers and businesses reduce their spending. As aggregate demand falls, the equilibrium price level will also fall, as suppliers will need to reduce prices to clear their inventories. Finally, the equilibrium level of GDP will fall, as the decrease in aggregate demand results in lower output and employment levels. Therefore, the correct choice is A.

Interest Rates in the Economy Have Risen