The interest-rate effect predicts that higher prices:
A) make it more expensive to borrow, leading to higher interest rates and less investment.
B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C) decrease borrowing, leading to higher interest rates and less investment.
D) increase borrowing, leading to higher interest rates and less investment.

Question

Quizplus · Accepted Answer

The interest-rate effect suggests that higher prices increase the demand for money, leading to higher interest rates, which in turn reduces investment.

The Interest-Rate Effect Predicts That Higher Prices