What does the interest-rate effect mean?
A)That an increase in the money supply will increase the rate of interest and cause investment to fall.
B)That a decrease in prices will reduce the rate of interest which will cause investment to increase.
C)That an increase in the price level will decrease interest rates,and decrease consumption and investment spending.
D)That an increase in the price level will decrease the demand for money and spending.
E)That an increase in Real GDP will increase the price level.

Question

Quizplus · Accepted Answer

The interest-rate effect suggests that lower prices lead to lower interest rates, which in turn encourage more investment by making borrowing cheaper. This is a key mechanism in macroeconomics that explains part of the downward slope of the aggregate demand curve.

What Does the Interest-Rate Effect Mean