According to the interest-rate effect, as the price level:
A) rises, people feel poorer and buy less.
B) rises, Australian products become more expensive and foreigners buy fewer Australian goods.
C) rises, interest rates fall and people buy less.
D) rises, interest rates rise and people buy less.

Question

Quizplus · Accepted Answer

According to the interest-rate effect, as the price level rises, interest rates will rise. This occurs because lenders will require a higher interest rate to compensate for the decrease in the value of the money they will be repaid. As interest rates rise, borrowing becomes more expensive and individuals and businesses will likely buy less, resulting in a decrease in aggregate demand.

According to the Interest-Rate Effect, as the Price Level