When a change in the price level leads to a change in saving,this is known as the:
A) wealth effect.
B) international trade effect.
C) savings effect.
D) interest rate effect.
E) output effect.

Question

Quizplus · Accepted Answer

When a change in the price level leads to a change in saving, it is known as the interest rate effect. This occurs because changes in the price level affect the real value of money and savings, which, in turn, affects the demand for loans and the interest rates. When prices increase, the real value of money decreases, and people will need to save more to compensate. This increase in saving shifts the demand for loans to the right, leading to an increase in interest rates. Conversely, a decrease in prices leads to an increase in the real value of money, causing people to save less, which shifts the demand for loans to the left, causing interest rates to decrease.

When a Change in the Price Level Leads to a Change