As the price level falls, so does the cost of borrowing money, leading the quantity of output requested to fall. This is known as the interest rate effect.
It should be emphasized that as interest rates rise, both businesses and individuals would reduce their expenditure.
As a result, earnings will fall and stock prices will decline; however, when interest rates fall significantly, consumers and businesses will be forced to increase their spending, causing stock prices to climb.
Thus, As the price level falls, so does the cost of borrowing money, leading the quantity of output requested to fall.
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