Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given income. This shift, in a neoclassical economy, will:
A) lower investment and raise the interest rate.
B) raise investment and lower the interest rate.
C) lower both investment and the interest rate.
D) raise both investment and the interest rate.

Question

Quizplus · Accepted Answer

An increase in consumer confidence leads to higher current consumption, which in turn increases demand for funds. This higher demand for funds raises the interest rate. As the interest rate rises, the cost of borrowing increases, leading to a decrease in investment.

Assume That an Increase in Consumer Confidence Raises Consumers' Expectations