Refer to the information provided in Figure 11.5 below to answer the questions that follow. Figure 11.5
-Refer to Figure 11.5. As a result of an increase in the price level, the equilibrium interest rate ________ and the equilibrium output level ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question

Refer to the information provided in Figure 11.5 below to answer the questions that follow.  Figure 11.5
-Refer to Figure 11.5. As a result of an increase in the price level, the equilibrium interest rate ________ and the equilibrium output level ________.
A) increases; increases 
B) increases; decreases 
C) decreases; increases 
D) decreases; decreases

Quizplus · Accepted Answer

According to the figure, an increase in the price level results in a decrease in the quantity of goods and services demanded (shift from AD1 to AD2) which leads to a decrease in the equilibrium output level. At the same time, an increase in the price level increases the quantity of money demanded (shift from Ms1 to Ms2) which leads to an increase in the equilibrium interest rate. Therefore, the correct answer is B, which states that the equilibrium interest rate increases and the equilibrium output level decreases.

Refer to the Information Provided in Figure 11