Other things constant, an increase in the real interest rate will
A) cause consumers to reduce their purchases of durable items like appliances and automobiles.
B) induce businesses to increase their level of investment.
C) make borrowing money more attractive.
D) increase the natural rate of unemployment.

Question

Quizplus · Accepted Answer

An increase in the real interest rate increases the cost of borrowing, which reduces consumers' desire to borrow money to purchase items such as appliances and automobiles. Therefore, it is likely to cause consumers to reduce their purchases of these durable items. Option B and C are incorrect because an increase in the real interest rate does not necessarily induce businesses to increase their level of investment, and for borrowers, higher interest rates make borrowing money more expensive, not attractive. Option D is also incorrect, as there is no direct relationship between an increase in the real interest rate and the natural rate of unemployment.

Other Things Constant, an Increase in the Real Interest Rate