If the real interest rate decreases, people decide to ________ because the opportunity cost of ________.
A) increase their consumption expenditure; saving has decreased.
B) increase their consumption expenditure; consumption has decreased.
C) decrease their consumption expenditure; consumption has decreased.
D) save more; saving has decreased.
E) None of the above answers are correct.

Question

Quizplus · Accepted Answer

When the real interest rate decreases, the opportunity cost of consuming today instead of saving and earning interest tomorrow decreases. This means that people are more likely to choose to consume more today, leading to an increase in their consumption expenditure. Therefore, the correct answer is B, which states that people decide to increase their consumption expenditure because consumption has decreased.

If the Real Interest Rate Decreases, People Decide to ________