The interest rate effect suggests that
A) an increase in the price level decreases the interest rate, which causes businesses and consumers to reduce desired spending.
B) an increase in the price level increases the interest rate, which causes businesses and consumers to reduce desired spending.
C) a decrease in the price level decreases the interest rate, which causes businesses and consumers to reduce desired spending.
D) an increase in the price level increases the money supply, which causes businesses and consumers to increase desired spending.

Question

Quizplus · Accepted Answer

The interest rate effect suggests that an increase in the price level increases the interest rate. This increase in interest rate causes businesses and consumers to reduce desired spending, as borrowing becomes more expensive. Therefore, choice B is the correct answer.

The Interest Rate Effect Suggests That