Question

Other things being the same, how does a higher real interest rate affect the quantity of _______?

1) Goods and services demanded
2) Goods and services supplied
3) Investment
4) Consumption

Answer 1

A higher real interest rate affects the quantity of goods and services demanded, investment, and consumption.

Step-by-step explanation:

A higher real interest rate affects the quantity of goods and services demanded, investment, and consumption in the following ways:

1. Goods and services demanded: A higher real interest rate increases the cost of borrowing for consumers and businesses. This leads to a decrease in borrowing and spending, resulting in a decrease in the quantity of goods and services demanded.
2. Investment: Higher interest rates make borrowing more expensive for businesses. This reduces their incentive to invest in new projects or expand existing ones, leading to a decrease in investment.
3. Consumption: Higher interest rates also make borrowing more expensive for individuals. This reduces their ability to finance large purchases such as homes and cars, leading to a decrease in consumption.