A reduction in real interest rates will cause the demand for new homes to
A)increase, which results in an increase in investment expenditures.
B)increase, which results in an increase in consumption expenditures.
C)decrease, which results in a decrease in investment expenditures.
D)decrease, which results in a decrease in consumption expenditures.
E)increase, which will result in an increase in business fixed investment.

Question

Quizplus · Accepted Answer

A reduction in real interest rates will make it less expensive for individuals and businesses to borrow money for investment. Since the purchase of a new home is a form of investment, a decrease in real interest rates will increase the demand for new homes, which will in turn result in an increase in investment expenditures.

A Reduction in Real Interest Rates Will Cause the Demand