Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause _ in desired consumption and in desired investment.
A)a decrease; an increase
B)an increase; an increase
C)a decrease; no change
D)a decrease; a decrease
E)an increase; a decrease

Question

Quizplus · Accepted Answer

An exogenous increase in the real interest rate reduces the level of consumption and investment in the economy due to the higher cost of borrowing. As a result, both desired consumption and desired investment decline, causing a decrease in overall aggregate demand. Therefore, Choice D, which predicts a decrease in both desired consumption and investment, is the correct answer.

Consider an Exogenous Increase in the Real Interest Rate in the Simple