When the price level rises and increases the demand for money, the nominal interest rate ________ and the real interest rate ________.
A) rises; rises
B) falls; falls
C) does not change; does not change
D) falls; rises
E) rises; falls

Question

Quizplus · Accepted Answer

When the price level rises, increasing the demand for money, the nominal interest rate rises because lenders need to be compensated for the decreased purchasing power of money. The real interest rate also rises as the cost of borrowing in terms of real goods and services increases.

When the Price Level Rises and Increases the Demand for Money