An increase in interest rates, all else equal, will cause ... Select one: a. A decrease in both Real GDP and price level. b. An increase in both Real GDP and price level c. An increase in Real GDP, but a decrease in price level d. A decrease in Real GDP, but an increase in price level

Question

Business

Mohamed Gould

5 May, 15:38

An increase in interest rates, all else equal, will cause ... Select one: a. A decrease in both Real GDP and price level. b. An increase in both Real GDP and price level c. An increase in Real GDP, but a decrease in price level d. A decrease in Real GDP, but an increase in price level

+5

Answers (2)

Know the Answer?

Dania Cain · Answer 1

A. A decrease in both Real GDP and price level.

Explanation:

Interest rates are usually increased by Central Banks to reduce price levels caused by inflation rising above target.

The effect is to moderate growth, increase cost of borrowing, reduce spending or disposable income and consumption.

Such actions also decrease the Real GDP. The Real GDP or Real Gross Domestic Product is GDP adjusted for inflation or deflation to obtain the nominal value.

Since an increase in interest rates reduces consumption, it also reduces GDP. GDP is the value of all goods and services produced in an economy. More production is achieved when there is more disposable income and vice versa.

Moises Christian · Answer 2

Answer: A decrease in real GDP but an increase in price level (D)

Explanation:

A real GDP has to do with the measurements of the output of goods in an economy that has been adjusted due to inflation. An increase in interest rates will lead to an increase in the cost of borrowing, and the cost of investing and this will discourage businesses from investing and due to this, there will be a reduction in consumption as well.

Also, an increase in the interest rate will lead to an increase in the price level. So, an increase in interest rates will cause real GDP to decrease.