For a Borrower,an Increase in the Real Interest Rate

question 16

Multiple Choice

For a borrower,an increase in the real interest rate

• A) definitely reduces current consumption and increases future consumption.
• B) reduces current consumption and has an uncertain effect on future consumption.
• C) has an uncertain effect on current consumption and increases future consumption.
• D) has an uncertain effect on both current and future consumption.

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Definitions:

UIP

Uncovered Interest Parity, a financial theory stating that the difference in interest rates between two countries will equal the expected change in exchange rates between their currencies.

Spot Exchange Rate

The current exchange rate at which currencies can be exchanged for immediate delivery, reflecting the market's immediate valuation.

U.S. Inflation

The rate at which the general level of prices for goods and services is rising, and, consequently, the purchasing power of currency is falling within the United States.

Dollar Rally

A situation where the value of the U.S. dollar strengthens significantly against a basket of other currencies.