Which of the Following Correctly Describes the Interest-Rate Effect

question 8

Multiple Choice

Which of the following correctly describes the interest-rate effect?

• A) If the price level decreases, consumer purchasing power decreases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
• B) If the price level decreases, consumer purchasing power increases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
• C) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
• D) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates fall, debt-financed borrowing increases, and real GDP demanded increases.

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Definitions:

Sunk Costs

Costs that cannot be recovered. They are unavoidable even in the long run.

Economic Environment

The economic environment consists of all the external economic factors that influence buying habits, business operations, and growth prospects of entities.

Economic Profits

The discrepancy between total income and overall expenses, encompassing all direct and indirect costs.

Production Costs

The total expenses incurred in the manufacture of a product, including raw materials, labor, and overhead.