Which of the following will result as part of the interest rate effect when the price level rises?
A)Households and firms increase their holdings of money.
B)Interest rates will increase.
C)A lower quantity of real GDP will be demanded.
D)All of the above will result as part of the interest rate effect when the price level rises.

Question

Which of the following will result as part of the interest rate effect when the price level rises?
A)​Households and firms increase their holdings of money.
B)​Interest rates will increase.
C)​A lower quantity of real GDP will be demanded.
D)​All of the above will result as part of the interest rate effect when the price level rises.

Quizplus · Accepted Answer

When the price level rises, households and firms need more money for transactions, leading to increased demand for money. This increased demand typically causes interest rates to rise as money becomes more scarce or expensive to borrow. Higher interest rates, in turn, discourage borrowing and spending, leading to a lower quantity of real GDP demanded. This sequence of events is known as the interest rate effect, making all the listed options correct outcomes of a rise in the price level.

Which of the Following Will Result as Part of the Interest