The level of aggregate output demanded falls when the price level rises, because the resulting increase in the interest rate will lead to
A) higher investment spending and higher consumption spending.
B) lower investment spending and higher consumption spending.
C) higher investment spending and lower consumption spending.
D) lower investment spending and lower consumption spending.

Question

Quizplus · Accepted Answer

When the price level rises, the interest rate also rises. This leads to a decrease in investment spending, as borrowing becomes more expensive, and a decrease in consumption spending, as people save more to earn a higher return on their savings. Therefore, the level of aggregate output demanded falls.

The Level of Aggregate Output Demanded Falls When the Price