An Increase in the Real Interest Rate Is an Example

question 19

Multiple Choice

An increase in the real interest rate is an example of a

• A) pure substitution effect.
• B) substitution effect and a positive income effect.
• C) substitution effect and a negative income effect.
• D) substitution effect and an income effect whose sign depends on whether the consumer is initially a borrower or a lender.
• E) positive substitution effect and a negative income effect.

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Definitions:

Interest

The cost of borrowing money or the payment received for the investment of money, typically expressed as a percentage of the principal.

Maturity Value

Maturity Value is the amount payable to an investor at the maturity date of a financial instrument, typically including the principal and the interest.

Note Receivable

A written promise to pay a specified amount, usually interest-bearing, that is recognized as an asset on the lender's balance sheet.

Promissory Notes

Written promises to pay a specified sum of money to a certain person or entity at a defined time or on demand.