The interest rate determines ______ in the goods market and money ______ in the money market.
A) government spending; demand
B) government spending; supply
C) investment spending; demand
D) investment spending; supply

Question

Quizplus · Accepted Answer

The interest rate affects investment spending in the goods market, which in turn affects the demand for money in the money market. As interest rates rise, the cost of borrowing increases, which may lead to a decrease in investment spending and therefore a decrease in demand for money. Conversely, as interest rates fall, the cost of borrowing decreases, which may lead to an increase in investment spending and therefore an increase in demand for money. Therefore, the interest rate determines investment spending and its related demand for money in the money market.

The Interest Rate Determines ______ in the Goods Market and Money