Question

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the _____.
(A) interest-rate effect
(B) real balance effect
(C) investment effect
(D) disinvestment effect

Answer 1

The supply of loan able funds, increases the interest rate, and discourages both consumption and investment. This process is called the Interest Rate Effect

Explanation:

The impact of a rise in the cost of borrowing on production costs due to price inflation within an economy.

The interest rate effect reflects the fact that most consumers and business finance managers will cut back on their borrowing activities when interest rates increase.