Within the AD/AS model, if consumers increase their savings and cut back on their spending, the
A) natural rate of unemployment will increase.
B) real interest rate will decrease and, thereby, cushion the reduction in consumption spending.
C) real interest rate will increase because of the higher rate of saving.
D) long-run aggregate supply will decrease to restore equilibrium.

Question

Quizplus · Accepted Answer

When consumers save more and spend less, the demand for money decreases, leading to a decrease in the real interest rate. This lower interest rate can encourage investment and consumption, partially offsetting the initial reduction in consumption spending.

Within the AD/AS Model, If Consumers Increase Their Savings and Cut