What of the following properly describes the interest rate effect?A higher price level leads to higher money demand, higher money demand lead to higher interest rates a  higher interest rate...

What of the following properly describes the interest rate effect?

A higher price level leads to higher money demand, higher money demand lead to higher interest rates a  higher interest rate increases the quality of good and service demanded

or a higher price level leads to a higher money demand, higher money demand leads to lower interest rates a higher interest rate teduces the quantity of goods and services demanded

or lower price level leads to lower money demand, lower money demand leads to lower interest rates and lower interest rate reduces the quantity of goods and services demanded

or none of the above

Asked on by johnd1

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The only one of these choices that could be correct is the first one.  The others show an improper connection between price and quantity demanded.  The one caveat is that the phrase in the first option that reads "quality of good and service demanded" must read "quantity..." in order for this to be correct.

The second option has higher money demand leading to lower interest rates.  This cannot be since interest rates are the price of money.  The third option has lower interest rates leading to a reduced quantity demanded of goods and services.  This cannot be since lower interest rates make it easier for consumers to buy.

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