Changes in future expected interest rates can affect current consumption. Suppose individuals expect future interest rates to increase. Consumption will change as a result of this expectation when which of the following change?
A) Human wealth.
B) The value of bonds.
C) The value of stocks.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

Expectations of future interest rate increases can affect human wealth (as the present value of future income changes), the value of bonds (as bond prices move inversely to interest rates), and the value of stocks (as higher interest rates can reduce stock valuations through increased discount rates and potentially slower economic growth).

Changes in Future Expected Interest Rates Can Affect Current Consumption