When the price level decreases:

A. The demand for money falls and the interest rate falls

B. Holders of financial assets with fixed money values decrease their spending

C. Holders of financial assets with fixed money values have less purchasing power

D. There is a decrease in consumer spending that is sensitive to changes in interest rates

Question

Business

Cross

1 March, 05:09

When the price level decreases:

A. The demand for money falls and the interest rate falls

B. Holders of financial assets with fixed money values decrease their spending

C. Holders of financial assets with fixed money values have less purchasing power

D. There is a decrease in consumer spending that is sensitive to changes in interest rates

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Answers (1)

Know the Answer?

Sadie House · Answer 1

A. The demand for money falls and the interest rate falls

Explanation:

As in general sense when the price level falls it means that the goods will cost less than the earlier stated cost. As the cost will fall the value of money will increase in terms of goods.

Accordingly an individual can buy more goods with same amount of money. This will reduce the demand for money in the market.

Ultimately people will not borrow money and that the demand for loans will fall. Accordingly as banks earn through interest income on loans they will be ready to lend at a lower rate of interest.

Thus, option A is correct.