The interest rate effect of a change in the aggregate price level occurs when:
A) a higher price level decreases the purchasing power of money, resulting in an increase in the interest rate.
B) the Fed uses contractionary monetary policy, causing an increase in the interest rate.
C) government borrowing in the loanable funds market raises the interest rate.
D) the price of a bond increases, reducing the interest rate.

Question

Quizplus · Accepted Answer

An increase in the aggregate price level decreases the purchasing power of money, leading to an increase in the demand for money and a decrease in the supply of money. This causes the interest rate to increase as people demand a higher return on their money due to higher inflation expectations.

The Interest Rate Effect of a Change in the Aggregate