The substitution effect indicates that higher real interest rates ________ current consumption for households who are lenders and ________ current consumption for households who are borrowers.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

Higher real interest rates make saving more attractive and borrowing more expensive, leading to decreased current consumption for both lenders and borrowers due to the substitution effect.

The Substitution Effect Indicates That Higher Real Interest Rates ________