For a borrower, an increase in the real interest rate
A)definitely reduces current consumption and future consumption.
B)has an uncertain effect on both current and future consumption.
C)has an uncertain effect on current consumption and increases future consumption.
D)definitely reduces current consumption and increases future consumption.
E)reduces current consumption and has an uncertain effect on future consumption.

Question

Quizplus · Accepted Answer

An increase in the real interest rate makes borrowing more expensive, which typically reduces current consumption as individuals are less inclined to borrow for spending. However, for future consumption, the effect is uncertain because while it may discourage saving due to higher costs of borrowing, it also means higher returns on savings for those who do save, potentially increasing future consumption.

For a Borrower, an Increase in the Real Interest Rate