An increase in the real interest rate is an example of a

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Quizplus · Accepted Answer

An increase in the real interest rate will result in a substitution effect, where consumers are incentivized to save more and borrow less as the opportunity cost of borrowing increases. Additionally, the income effect will depend on whether the consumer is initially a borrower or a lender. Borrowers will have a negative income effect as their purchasing power decreases, while lenders will have a positive income effect as their interest income increases. Therefore, option D is the best choice.

An Increase in the Real Interest Rate Is an Example