The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off
A)government spending.
B)government spending and unplanned investment.
C)investment and consumption spending.
D)net exports.
E)household savings.

Question

Quizplus · Accepted Answer

When the price level increases, the interest rate also increases because lenders need to be compensated for the loss in purchasing power caused by inflation. As the interest rate rises, it becomes more expensive for businesses and households to borrow money. This decrease in borrowing discourages investment and consumption spending, which in turn slows down economic activity. Therefore, the interest rate effect chokes off investment and consumption spending.

The "Interest Rate Effect" Can Be Described as an Increase