Suppose households feel more optimistic about the future and decide to increase consumption. This rise in consumer confidence will cause:
A) the natural real interest rate to rise.
B) the natural real interest rate to fall.
C) ambiguous effects on the natural real interest rate.
D) no effect on the natural real interest rate.
E) the natural real interest rate falls when the nominal rate falls.

Question

Quizplus · Accepted Answer

When households feel more optimistic and decide to increase consumption, this typically leads to an increase in demand for goods and services. To accommodate this increased demand, businesses may need to invest more in capital, which can lead to an increase in the demand for loanable funds. As a result, the natural real interest rate, which balances the supply and demand for loanable funds without central bank intervention, is likely to rise.

Suppose Households Feel More Optimistic About the Future and Decide