According to the intertemporal substitution effect, when the price level rises and other things remain the same
A) government taxes rise.
B) the interest rate falls.
C) the interest rate rises.
D) the quantity of money increases.

Question

Quizplus · Accepted Answer

The intertemporal substitution effect states that when the price level rises, individuals will want to consume less in the present and save more to consume in the future when prices are lower. This increased demand for savings will cause the interest rate to rise, as individuals compete to borrow money to save for the future. Therefore, choice C, the interest rate rises, is the correct answer.

According to the Intertemporal Substitution Effect, When the Price Level