When the price level rises, the interest rate effect states that wealth levels fall for all consumers as they have to withdraw more funds from banks to pay for their goods and services.

Question

Quizplus · Accepted Answer

The statement is incorrect as the interest rate effect actually states that when the price level rises, interest rates will also rise, which will cause a reduction in consumer spending and investment. This may lead to a contraction in economic output and a decrease in wealth levels, but it is not a direct result of withdrawing funds from banks to pay for goods and services.

When the Price Level Rises, the Interest Rate Effect States