If disposable income increases, people _______ saving and the real interest rate _______.
A)decrease; rises
B)decrease; falls
C)increase; falls
D)increase; rises
E)increase; rises or falls depending on the shift of the demand curve for loanable funds

Question

Quizplus · Accepted Answer

When disposable income increases, people tend to increase their consumption and saving. As a result, the demand for loanable funds increases, which puts upward pressure on the real interest rate. Therefore, the statement "if disposable income increases, people increase saving and the real interest rate falls" is incorrect, making options A and B incorrect. Option E is also incorrect as the shift of the demand curve for loanable funds is not specified in the question. Option D is also incorrect as it suggests that an increase in disposable income leads to an increase in the real interest rate, which is contradictory to the logic explained above. Therefore, option C is the correct answer.

If Disposable Income Increases, People _______ Saving and the Real