The private supply of credit is an increasing function of the real interest rate if
A)the income effects outweighs the substitution effects when added across all consumers.
B)the income effect outweighs the substitution effects for borrowers.
C)the substitution effects outweighs the income effects when added across all consumers.
D)the substitution and income effects cancel each other.
E)consumers are rational.

Question

Quizplus · Accepted Answer

The substitution effect, which occurs when consumers react to an increase in the real interest rate by saving more (since saving becomes relatively more attractive compared to consuming), outweighs the income effect, leading to an overall increase in the supply of credit.

The Private Supply of Credit Is an Increasing Function of the Real