When prices rise, the interest rate:
A) tends to rise.
B) tends to fall.
C) is usually not affected.
D) will rise if the wealth effect outweighs the price effect.

Question

Quizplus · Accepted Answer

When prices rise, inflation increases. In order to combat inflation, central banks may increase interest rates to reduce consumer spending and borrowing. Therefore, the interest rate tends to rise when prices rise.

When Prices Rise, the Interest Rate