The interest rate effect is considered to have
A)a direct effect because interest rates move in the same direction as changes in quantity demanded.
B)a direct effect because increases in the price level lead to increases in interest rates.
C)an indirect effect because price level increases cause borrowing to increase,which raises interest rates and reduces quantity demanded for goods and services.
D)an indirect effect because higher prices lead to lower interest rates.

Question

Quizplus · Accepted Answer

The interest rate effect is considered to have an indirect effect because when the price level increases, it typically leads to more borrowing. This increase in borrowing can drive up interest rates, which in turn can reduce the quantity demanded for goods and services, as higher interest rates make borrowing more expensive.

The Interest Rate Effect Is Considered to Have