Which of the following is an example of the interest-rate effect,assuming the U.S.price level decreases?
A) The purchasing power of money decreases and people buy more goods
B) U.S.goods are more expensive for foreigners to buy and exports decrease
C) U.S.production costs increase and producers charge higher prices
D) The demand for loans decreases so interest rates decline and loan-financed purchases increase

Question

Quizplus · Accepted Answer

According to the interest-rate effect, a decrease in the price level in the U.S. economy will lower the demand for loans as people will require less money to purchase goods and services. This decrease in demand for loans will lead to a decline in interest rates. Reduced interest rates will make it cheaper to obtain loans, thus increasing the level of loan-financed purchases. Therefore, option D is the correct answer.

Which of the Following Is an Example of the Interest-Rate