In the Two-Period Model, a Higher Real Interest Rate

question 55

Multiple Choice

In the two-period model, a higher real interest rate

• A)increases the present value of income.
• B)causes the budget constraint to rotate in a counterclockwise direction.
• C)makes households that had initially planned to save better off.
• D)makes households that had initially planned to borrow better off.

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Definitions:

Adverse Selection

A situation where asymmetrical information leads to transactions between parties where the high-risk party is more likely to participate than the low-risk party.

Moral Hazard

A situation in economic theory where one party takes more risks because they know another party bears the cost of those risks.

Product Failure

A situation in which a product does not meet the expectations of consumers or fails to perform as intended, leading to its commercial failure.

Antilock Brakes

A safety system in vehicles that prevents the wheels from locking up and ensures the driver maintains steering control during an emergency braking situation.