Hello All, This is in reference to Aggregate supply and demand section; more precisely the equation AD= C + I + G + X Why do the interest rates go up when price level goes up? Thanks. P
Price level increases causes real income to decrease. People want to maintain their lifestyle so they borrow money. That causes the demand for money to increase which causes the price of money to increase. The price of money is just interest rates.
Perfectly logical. Thank you.