If current and future consumption are both normal goods, an increase in the interest rate will necessarily
A)cause savers to save more.
B)cause borrowers to borrow less.
C)reduce everyone's current consumption.
D)make everyone worse off.
E)None of the above.

Question

Quizplus · Accepted Answer

When the interest rate increases, the cost of borrowing money also increases. This will make borrowing less attractive to consumers and therefore, they will borrow less. As a result, there will be a reduction in current consumption. However, savers may choose to save more due to the higher interest rate, but this is not necessarily true for everyone. The statement "make everyone worse off" is too extreme and cannot be concluded with certainty. Therefore, option B is the best choice.

If Current and Future Consumption Are Both Normal Goods, an Increase