The Substitution Effect of a Decrease in Real Interest Rates

question 60

Multiple Choice

The substitution effect of a decrease in real interest rates is to cause a consumer to

• A)increase future consumption and decrease current consumption.
• B)decrease future consumption and increase current consumption.
• C)increase current consumption and increase saving.
• D)decrease current consumption and increase saving.

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Definitions:

Pretax Income

The amount of income earned by a business before any taxes have been deducted.

Fixed Costs

Fixed costs are business expenses that do not change with the level of goods or services produced by the business, such as rent, salaries, and insurance.

Variable Costs

Costs that vary directly with the level of production or sales volume, such as materials and labor directly involved in manufacturing a product.

Units

A measure of quantity used to express the amount of a product, service, or resource, often used in production and inventory contexts.