Part of the story of the interest rate effect is that a lower price level causes __________ in the demand for credit,which then causes the interest rate to __________.
A) a decrease; fall
B) a decrease; rise
C) an increase; fall
D) an increase; rise

Question

Quizplus · Accepted Answer

When the price level falls, there is a decrease in the demand for credit because people and businesses have to spend less money to purchase goods and services. As a result, there is less demand for credit, and this puts downward pressure on interest rates. Therefore, a lower price level causes a decrease in the demand for credit, which then causes the interest rate to fall.

Part of the Story of the Interest Rate Effect Is