For a borrower, an increase in the real interest rate
A) definitely reduces current consumption and increases future consumption.
B) reduces current consumption and has an uncertain effect on future consumption.
C) has an uncertain effect on current consumption and increases future consumption.
D) has an uncertain effect on both current and future consumption.
E) definitely reduces current consumption and future consumption.

Question

Quizplus · Accepted Answer

An increase in the real interest rate increases the cost of borrowing, which reduces current consumption. However, it also increases the return on saving, which may encourage saving and increase future consumption. Therefore, the effect on future consumption is uncertain.

For a Borrower, an Increase in the Real Interest Rate