For a borrower,an increase in the real interest rate
A) definitely reduces current consumption and increases future consumption.
B) reduces current consumption and has an uncertain effect on future consumption.
C) has an uncertain effect on current consumption and increases future consumption.
D) has an uncertain effect on both current and future consumption.
E) definitely reduces current consumption and future consumption.

Question

Quizplus · Accepted Answer

An increase in the real interest rate makes borrowing more expensive, which discourages borrowing and reduces current consumption. However, the effect on future consumption is uncertain because it depends on the individual's preference for current versus future consumption. Some borrowers may choose to save more to reach their future consumption goals, while others may choose to reduce their future consumption to maintain their current lifestyle.

For a Borrower,an Increase in the Real Interest Rate