When drawn against the real interest rate, the output supply curve is upward sloping because labour supply is
A) increasing the real interest rate and labour demand is independent of the real interest rate.
B) decreasing the real interest rate and labour demand is independent of the real interest rate.
C) independent of the real interest rate and labour demand is increasing the real interest rate.
D) independent of the real interest rate and labour demand is decreasing the real interest rate.
E) increasing as the wage rate rises.

Question

Quizplus · Accepted Answer

The upward sloping output supply curve suggests that as the real interest rate increases, the quantity of output supplied also increases. This is because a higher real interest rate leads to an increase in the return on savings and investment, which encourages individuals to supply more labor in order to earn more income. Labour demand, on the other hand, is assumed to be independent of the real interest rate.

When Drawn Against the Real Interest Rate, the Output Supply