I don’t know how many times I have to keep saying this before the rest of the profession figures it out. Never reason from a price change. It makes no sense to argue whether a higher price will increase or decrease quantity. Here is a S&D diagram. I dare you to show me how price changes affect quantity.

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And here is an IS-LM diagram. Interest rates are the price of credit. Changes in interest rates do not have any effect on quantity of output, price of output, or any other variable. It’s not even an “other things equal” deal; price changes have no effect.

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At this point some economists will say; “I meant an interest rate change caused by a change in monetary policy.” The problem is that higher interest rates can be produced by both easier and tighter monetary policy. And easier and tighter monetary policy have opposite effects on prices and output. So I’m sorry, but it’s still a meaningless debate. It’s not that there is a right or wrong answer; there is no coherent question. Monetary policy can shift the LM curve, the IS curve, or both.

It's a powerful truism of market economics, in which prices are determined by supply and demand in competitive markets: prices don’t “cause” anything . The price is simply where the supply and demand curves intersect. Supply and demand “cause” price, not vice versa.

macrolens.substack.com • Reasoning From a Price Change - By Brian McCarthy