Consumption Can Be Sensitive to Changes in the Real Interest

question 55

Multiple Choice

Consumption can be sensitive to changes in the real interest rate because:

• A) higher interest rates can increase the cost of durable goods like automobiles.
• B) higher interest rates will result in less saving.
• C) lower real interest rates will decrease spending on durable goods and increase spending on non-durable goods.
• D) lower interest rates increase savings.

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Definitions:

Deflation

A decrease in the general price level of goods and services, often indicative of a reduction in the supply of money or credit in the economy.

Real Interest Rate

The interest rate recalibrated to factor in inflation, showcasing the real expense of borrowing or the legitimate profit from saving.

Nominal Interest Rate

The nominal interest rate, which reflects the raw rate of interest prior to being adjusted for inflation and represents the apparent value of financial dealings.

Market Basket

A selection of goods and services used to track price changes and inflation in an economy, representing the typical purchases made by consumers.