Because of the Income and Substitution Effects, a Higher Interest

question 16

Multiple Choice

Because of the income and substitution effects, a higher interest rate ________ current consumption and _______ current saving of a consumer.

• A) will definitely increase; will definitely decrease
• B) will definitely decrease; will definitely increase
• C) may increase or decrease; will definitely increase
• D) may increase or decrease; may increase or decrease

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Definitions:

Bond Discount

The difference between the bond's face value and its selling price when it is sold for less than its face value, representing the additional interest expense to the issuer.

Unamortized Discount

The portion of a bond discount that has not yet been amortized (gradually written off) over the period of the bond's life.

Redeemed

The process of exchanging a financial instrument, such as a bond or coupon, for its cash value.

Carrying Amount

The book value of an asset or liability on the balance sheet, calculated by deducting any accumulated depreciation or amortization from the asset's initial cost.