How do interest rates affect consumption in the economy?
A)Lower interest rates encourage consumers to save more money, and thus consumption rises.
B)Lower real interest rates imply a lower opportunity cost of consumption, and thus consumption rises.
C)Higher interest rates encourage consumers to increase financed purchases, and this encourages consumption.
D)Higher interest rates make it more expensive for firms to take loans, and so consumption falls.

Question

Quizplus · Accepted Answer

Lower real interest rates decrease the opportunity cost of consumption because the return on saving is lower, making it more attractive for consumers to spend their money instead of saving. In contrast, higher interest rates increase the return on saving, making it more attractive for consumers to save instead of spend, thus reducing consumption.

How Do Interest Rates Affect Consumption in the Economy