In a Two-Year Period,if a Higher Interest Rate Causes Consumption

question 45

Multiple Choice

In a two-year period,if a higher interest rate causes consumption in year 1 to rise:

• A)the income effect associated with the higher interest rate is greater than the substitution effect.
• B)the substitution effect associated with the higher interest rate is greater than the income effect.
• C)the income effect of the higher interest rate is negative.
• D)the substitution effect of the higher interest rate is positive.

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Definitions:

Cost Driver

A factor that causes a change in the cost of an activity.

Machine Hours

A measure of the amount of time a machine is operated, used in calculating manufacturing costs and efficiency.

Fixed Overhead Volume Variance

The difference between the budgeted fixed overhead and the actual fixed overhead incurred, due to changes in production volume.

Standard Cost

A predetermined cost of manufacturing an item, including direct materials, labor, and overheads, used for budgeting and performance evaluation.