The interest rate is a determinant of ______ in the goods market and money ______ in the money market.
A) government spending; demand
B) government spending; supply
C) investment spending; demand
D) investment spending; supply

Question

Quizplus · Accepted Answer

A change in interest rates affects investment spending, which is a component of aggregate demand in the goods market. This is because higher interest rates increase the cost of borrowing, making it more expensive for firms to invest in new projects. In the money market, higher interest rates increase the incentive for individuals to save, increasing the supply of money. This is because savers will earn a higher return on their savings at higher interest rates. Therefore, the answer is C - investment spending in the goods market, and money demand in the money market are affected by changes in interest rates.

The Interest Rate Is a Determinant of ______ in the Goods