Suppose That the Real Interest Rate Climbs

question 46

Multiple Choice

Suppose that the real interest rate climbs. In that case,

• A) the income effect pushes consumption in the first year up in opposition to the substitution effect that pushes down first-year consumption.
• B) the income effect pushes consumption up in the second year and is supported by a second push generated in year 2 by the substitution effect.
• C) it would be impossible to tell whether consumption increases or decreases in year 1 because the income and substitution effects push in opposite directions.
• D) the substitution effect tends to depress current consumption because future consumption becomes less expensive.
• E) all of the above.

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Definitions:

Absorption Costing

A costing method that includes all manufacturing costs, both fixed and variable, in the cost of a product.

Variable Costing

An accounting method that includes only variable production costs (costs that change with the level of output) in the cost of goods sold, highlighting the impact of production volume on profitability.

Variable Costing

An accounting method that includes only variable costs—costs that change with production levels—in the cost of production.

Absorption Costing Reports

A financial document that includes all the manufacturing costs associated with the production of goods, both variable and fixed costs.