An increase in the real interest rate is an example of a
A) pure substitution effect.
B) substitution effect and a positive income effect.
C) substitution effect and a negative income effect.
D) substitution effect and an income effect whose sign depends on whether the consumer is initially a borrower or a lender.
E) positive substitution effect and a negative income effect.

Question

Quizplus · Accepted Answer

An increase in the real interest rate affects consumers differently based on whether they are borrowers or lenders. For lenders, it can have a positive income effect, while for borrowers, it can have a negative income effect. The substitution effect generally encourages saving over consumption.

An Increase in the Real Interest Rate Is an Example