If the interest rate rises and people consume less today, this is called:
A) permanent income.
B) the precautionary effect.
C) the income effect.
D) the wealth effect.
E) the intertemporal marginal rate of substitution.

Question

Quizplus · Accepted Answer

The rise in interest rates leads to a decrease in the purchasing power of individuals, which means that people's wealth decreases, and hence they consume less today. This phenomenon is called the wealth effect.

If the Interest Rate Rises and People Consume Less Today