In the sticky-price model, a decrease in the baseline level of consumption spending will not result in an increase in savings, and thus a reduction in the real interest rate, because A) the reduction in consumption spending is not saved in financial markets. B) the decrease in national income reduces savings enough to offset the increase which comes from the decrease in C_o. C) the reduction in net exports reduces savings enough to offset the increase which comes from the decrease in C_o. D) the reduction in potential output reduces savings enough to offset the increase which comes from the decrease in C_o.

Question

Quizplus · Accepted Answer

In the sticky-price model, a decrease in the baseline level of consumption spending leads to a decrease in national income, which in turn reduces savings. This reduction in savings offsets any increase in savings that might have come from the initial decrease in consumption spending, thus preventing a reduction in the real interest rate.

In the Sticky-Price Model, a Decrease in the Baseline Level