According to the interest rate effect,a fall in the price level will
A)decrease the real value of money balances which causes the quantity demanded of aggregate output to increase.
B)increase lending which causes interest rates to fall,increasing investment spending and increasing the quantity demanded of aggregate output.
C)lead to a decrease in net exports,which causes the quantity demanded of aggregate output to decrease.
D)increase the real value of money balances which causes interest rates to increase,reducing the quantity demanded of aggregate output.

Question

Quizplus · Accepted Answer

The interest rate effect suggests that a fall in the price level increases the real value of money, which leads to more lending and lower interest rates. This decrease in interest rates makes borrowing cheaper, encouraging investment spending and thus increasing the quantity demanded of aggregate output.

According to the Interest Rate Effect,a Fall in the Price