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In the short run, an increase in the quantity of money ____ the price level and ____ real GDP. a. raises; increases b. raises; does not change c. raises; decreases d. does not change; increases Long-Run Effects of Money on Real GDP and the Price Level c. lower inflation rates. 163 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Key Concepts The Demand for Money Four factors influence the demand for money: ♦ The price level — An increase in the price level in-creases the nominal demand for money. 1 An increase in the price level (i.e., inflation), ceteris paribus, will cause an increase in average interest rates in an economy. 1 Of increase, decrease, or stay the same, the effect on the equilibrium interest rate when the domestic price level decreases, ceteris paribus. 2  Of increase, decrease, or stay the same, the effect on the equilibrium interest rate when the domestic price level in 1 An increase in the price level (i.e., inflation), ceteris paribus, will cause an increase in average interest rates in an economy. 2  In contrast, a decrease in the price level (deflation), ceteris paribus, will cause a decrease in average interest rates in an economy. This means that in the period during which the price level increases, inflation is occurring. Thus studying the effects of a price level increase is the same as studying the effects of inflation. When the price level changes, the interest-rate effect is activated, which is what then results in a change in aggregate expenditures and the movement long the aggregate demand curve. To illustrate this process, click the [Change Price Level] button. However, a boost in the price level that increases the interest rate on this loan to 12 percent results in monthly payments of $527. This extra $20 causes Duncan to pause and rethink this planned purchase. If he decides the extra expense is too much, then he has fallen victim to the interest-rate effect. 13. In the short run, an increase in the quantity of money ____ the price level and ____ real GDP. a. raises; increases b. raises; does not change c. raises; decreases d. does not change; increases Long-Run Effects of Money on Real GDP and the Price Level c. lower inflation rates. 14. 163 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Key Concepts The Demand for Money Four factors influence the demand for money: ♦ The price level — An increase in the price level in-creases the nominal demand for money. Effect of a Price Level Increase (Inflation) on Interest Rates. Next consider the effects of a price level increase in the money market. When the price level rises in an economy, the average price of all goods and services sold is increasing. Thus, an increase in the price level (i.e.,inflation) will cause an increase in average interest rates in an economy. In contrast, a decrease in the price level (deflation) will cause a decrease in average interest rates in an economy. International Finance Theory and Policy-Chapter 40-10: Last Updated on 1/11/05. But if the increase in the supply exceeds the increase in demand, the interest rate falls. Short-Run Effects of Money on Real GDP and the Price Level 15. T Higher interest rates ripple through the econ-omy, affecting many sectors. 163 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Key Concepts The Demand for Money Four factors influence the demand for money: ♦ The price level — An increase in the price level in-creases the nominal demand for money. This is “Effect of a Price Level Increase (Inflation) on Interest Rates”, section 18.10 from the book Policy and Theory of International Economics (v. 1.0). For details on it (including licensing), click here. This book is licensed under a Creative Commons by-nc-sa 3.0 license. This means that in the period during which the price level increases, inflation is occurring. Thus studying the effects of a price level increase is the same as studying the effects of inflation. Report Abuse. The lower the price level, the less money house holds need to spend on goods they want. They keep money in the banks These increase the supply of money in the banks, causing a rise in the market of loanable funds, lowering the interest rate. A lower interest rate encourages investment, as the rate at which they've to pay it back is low. A low interest rate in a country/ or euro zone, will cause people to buy more foreign assests instead of domestic ones, this increase the supply of the currency of that country, lowering the value of that currency.
http://facstaff.uww.edu/ahmady/courses/econ202/ps/sg8.pdf http://catalog.flatworldknowledge.com/bookhub/26?e=suranfin-ch07_s10 http://2012books.lardbucket.org/books/policy-and-theory-of-international-economics/s21-10-effect-of-a-price-level-increa.html http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=interest-rate+effect http://facstaff.uww.edu/ahmady/courses/econ202/ps/sg8.pdf http://internationalecon.com/Finance/Fch40/F40-10.php http://facstaff.uww.edu/ahmady/courses/econ202/ps/sg8.pdf http://2012books.lardbucket.org/books/policy-and-theory-of-international-economics/s21-10-effect-of-a-price-level-increa.html https://answers.yahoo.com/question/index?qid=20091216092819AA6kRhN
does a change in the price level change the interest rates