Question

Other things the same , as the price level rises, the real value of a dollar a. rises, and interest rates rise. b. falls, and interest rates rise. c. rises, and interest rates fall. d. falls, and interest rates fall.

Answer 1

Option (b) is correct.

Step-by-step explanation:

The rise in the prices of the products will lead to a situation of inflation in an economy. This inflation in a particular nation will depreciates the domestic currency and the purchasing power of the consumers falls.

Government uses various monetary policy and fiscal policy instruments to control inflation such as:

(i) Repo rate

(ii) Reverse repo rate

(iii) Cash reserve ratio

(iv) Open market operations

(v) Interest rate

Government of a nation increases the interest rate, so that it will become expensive to take loan from the banks and on the other hand it will become profitable for the depositors to deposits their money into the bank.