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.

---

Definitions:

Balance Sheet

A balance sheet that portrays a company's financial standing in terms of assets, liabilities, and the equity of its shareholders at a particular point.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, ending with the net income or loss for the period.

Times Interest Earned

A financial ratio that measures a company's ability to meet its debt obligations by comparing its income before interest and taxes (EBIT) to its interest expenses.

Balance Sheet

A financial statement that outlines a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a basis for computing rates of return and evaluating its capital structure.