The effect of an increase in current consumption that results when a higher real interest rate makes a consumer richer is called
A)the substitution effect of the real interest rate on saving.
B)the income effect of the real interest rate on saving.
C)the net effect of the real interest rate on saving.
D)the substitution effect of the real interest rate on consumption.

Question

Quizplus · Accepted Answer

The effect of an increase in current consumption that results when a higher real interest rate makes a consumer richer is called the income effect. This is because the higher real interest rate increases the purchasing power of the consumer's savings, making them feel richer and more willing to spend money on current consumption.

The Effect of an Increase in Current Consumption That Results