If an individual is a debtor, an increase in the interest rate
A) increases current consumption.
B) decreases current consumption.
C) has no effect on current consumption.
D) will either increase or decrease current consumption depending on the size of the income and substitution effects.

Question

Quizplus · Accepted Answer

An increase in the interest rate increases the cost of borrowing for a debtor. As a result, the debtor has to pay more interest on the loans they have taken, which reduces their disposable income. Consequently, the debtor will have to decrease their current consumption to service their debt obligations.

If an Individual Is a Debtor, an Increase in the Interest