The consumption share is negatively related to the real interest rate because a higher interest rate today
A)makes current consumption more expensive relative to future consumption.
B)lowers the price of current consumption relative to the future.
C)makes future consumption more expensive relative to current consumption.
D)reduces current savings.
E)increases the government share.

Question

Quizplus · Accepted Answer

A higher interest rate today means it is more expensive to borrow and consume now, which would make saving for and consuming in the future relatively more attractive. Therefore, a higher interest rate today would lead to a decrease in current consumption and an increase in savings, causing a negative correlation between consumption share and the real interest rate.

The Consumption Share Is Negatively Related to the Real Interest