An increase in the interest rate:
A)makes consumption in period two relatively more expensive compared to consumption in period one.
B)does not change relative cost of consuming in either period.
C)makes consumption in period two relatively cheaper compared consumption in period one.
D)discourages savings in each period.

Question

Quizplus · Accepted Answer

An increase in the interest rate makes future consumption (period two) relatively cheaper because the opportunity cost of consuming today (period one) increases, as saving yields a higher return.

An Increase in the Interest Rate