An increase in the real interest rate will:
A)decrease consumption and reduce investment.
B)decrease saving and investment.
C)increase investment and government spending.
D)decrease consumption and investment.

Question

Quizplus · Accepted Answer

An increase in the real interest rate will lead to higher borrowing costs, which will reduce consumption and investment. Therefore, the correct option is to decrease consumption and investment. Option A is incorrect because it only mentions consumption and does not account for the effect on investment. Option B is incorrect because a higher interest rate makes savings more attractive, so it would not decrease saving. Option C is incorrect because an increase in the real interest rate would not lead to an increase in government spending but rather a decrease due to higher borrowing costs.

An Increase in the Real Interest Rate Will