In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease, depending on whether consumption is greater or less than investment.

Question

Quizplus · Accepted Answer

In the classical model with fixed income, an increase in demand for goods and services leads to an increase in the price level. This increase in the price level results in a decrease in the real money supply, which then causes an increase in the interest rate as individuals try to increase their real money balances. Therefore, if the demand for goods and services is greater than the supply, the interest rate will increase.

In the Classical Model with Fixed Income, If the Demand