An increase in the real interest rate will
A) lead to an increase in the expected inflation rate.
B) increase the real cost of purchasing goods and services in the current period relative to future periods.
C) encourage borrowers to demand a larger quantity of funds.
D) reduce the quantity of funds supplied to the loanable funds market.

Question

Quizplus · Accepted Answer

An increase in the real interest rate will increase the real cost of purchasing goods and services in the current period relative to future periods. This means that consumers will be more likely to save their money for future purchases instead of spending it in the current period. This will decrease the quantity of funds supplied to the loanable funds market. An increase in the real interest rate is not likely to lead to an increase in the expected inflation rate, nor is it likely to encourage borrowers to demand a larger quantity of funds.

An Increase in the Real Interest Rate Will