An increase in the real interest rate will: a. most likely lower the reward to savings. b. most likely lower the cost of borrowing. c. cause consumers to spend more and save less. d. most likely lower consumer purchases of durable goods.
Question
An increase in the real interest rate will:
a. most likely lower the reward to savings.
b. most likely lower the cost of borrowing.
c. cause consumers to spend more and save less.
d. most likely lower consumer purchases of durable goods.
Solution
The correct answer is:
d. most likely lower consumer purchases of durable goods.
Here's why:
An increase in the real interest rate makes borrowing more expensive. This is because the interest that has to be paid back on loans is higher. As a result, consumers are less likely to take out loans to finance large purchases, such as durable goods (items that last a long time, like cars or appliances). Therefore, an increase in the real interest rate will most likely lower consumer purchases of durable goods. It will not lower the reward to savings (option a) or the cost of borrowing (option b), and it is likely to cause consumers to spend less and save more, not the other way around (option c).
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