Which of the following decreases in response to the interest-rate effect from an increase in the price level?
A)both investment and consumption
B)consumption but not investment
C)investment but not consumption
D)neither investment nor consumption

Question

Quizplus · Accepted Answer

According to the interest-rate effect, an increase in the price level leads to an increase in the interest rate. This increase in interest rate leads to a decrease in investment since it becomes more expensive for firms to borrow and invest. Additionally, higher interest rates also decrease disposable income, leading to a decrease in consumption. Therefore, both investment and consumption decrease in response to the interest-rate effect from an increase in the price level.

Which of the Following Decreases in Response to the Interest-Rate