The interest rate effect predicts that higher prices:
A) make it more expensive to borrow, leading to higher interest rates and less investment.
B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C) increase borrowing, leading to lower interest rates and more investment.
D) increase borrowing, leading to higher interest rates and less investment.

Question

Quizplus · Accepted Answer

The interest rate effect suggests that higher prices lead to increased borrowing, which raises interest rates and reduces investment.

The Interest Rate Effect Predicts That Higher Prices