According to the interest rate effect, as the price level decreases, households and firms' holdings of money increases, interest rates increase, investments decrease, and the quantity RGDP demanded decreases.
An interest rate effect can be defined as the effect of a decrease or an increase in aggregate demand and Real GDP in an economy, especially as a result of changes in interest rates set by the government of a country.
This ultimately implies that, as the price level decreases, households and business firms' holdings (possession) of money increases, interest rates increase, investments decrease, and the quantity of Real GDP demanded decreases in accordance with the interest rate effect.
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