Question

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will:______________.

Answer 1

lower investment and raise the interest rate.

Step-by-step explanation:

Investment = savings

In this scenario, the marginal propensity to consume (MPC) is increasing which means that consumers will spend a larger proportion of their disposable income and save less. The marginal propensity to save (MPS) = 1 - MPC, so a higher MPC will result in a lower MPS. Lower savings = lower investment.

Since the savings level will decrease, businesses needed money to finance their activities (includes corporations, banks, small businesses, etc.) will need to pay a higher interest for the lower available savings. If the supply of a good or service decreases at all demand levels, the equilibrium price will increase.