What are the effects of an increase in the price level?
A) People hold less money, so they lend less, and the interest rate rises.
B) People hold less money, so they lend more, and the interest rate falls.
C) People hold more money, so they lend more, and the interest rate falls.
D) People hold more money, so they lend less, and the interest rate rises.

Question

Quizplus · Accepted Answer

An increase in the price level leads to people holding more money in order to maintain their purchasing power. This means they have less money available for lending, which leads to a decrease in the supply of loanable funds. As a result, the interest rate rises.

What Are the Effects of an Increase in the Price