An increase in the expected real interest rate tends to
A)raise desired saving only.
B)raise desired investment only.
C)raise both desired saving and desired investment.
D)raise desired saving, but lower desired investment.

Question

Quizplus · Accepted Answer

An increase in the expected real interest rate tends to raise the cost of borrowing, which in turn reduces the desired level of investment by firms. At the same time, households tend to save more as the return on savings increases, leading to an increase in desired saving. Therefore, an increase in the expected real interest rate will raise desired saving but lower desired investment.

An Increase in the Expected Real Interest Rate Tends to