Everything else remaining the same, an increase in the interest rate increases saving and
A)increases aggregate demand through the wealth effect.
B)decreases aggregate demand through the international substitution effect.
C)decreases aggregate demand through the intertemporal substitution effect.
D)increases aggregate demand through the international substitution effect.
E)increases aggregate demand through the intertemporal substitution effect.

Question

Quizplus · Accepted Answer

An increase in interest rates increases the opportunity cost of consumption, therefore encouraging people to save more and consume less in the present. This is referred to as the intertemporal substitution effect, which decreases aggregate demand. The wealth effect and the international substitution effect work in the opposite direction, meaning they would not be the best choice.

Everything Else Remaining the Same, an Increase in the Interest