An increase in the expected real interest rate tends to
A)raise desired savings only.
B)raise desired investment only.
C)raise both desired savings and desired investment.
D)raise desired savings,but lower desired investment.

Question

Quizplus · Accepted Answer

An increase in expected real interest rate tends to increase the cost of borrowing for firms to finance their investment projects. This leads firms to reduce their desired level of investment. On the other hand, higher interest rates increase the return on savings and encourage households to save more, resulting in a higher level of desired savings. Therefore, an increase in the expected real interest rate raises desired savings but lowers desired investment, making choice D the correct answer.

An Increase in the Expected Real Interest Rate Tends to