Question

1 point What is the effect of an interest rate increase on the consumption of someone who was saving money before the rate increased?* First period consumption goes up, second period consumption goes down First period consumption goes down, second period consumption goes up First period consumption could go up or down, second period consumption goes up First period consumption goes up, second period consumption could go up or down First period consumption goes down, second period consumption could go up or down First period consumption could go up or down, second period consumption goes down

Answer 1

ANSWER : First period consumption goes up , and second period consumption goes down . People save money by consume less than his income for accumulation of capital in future . A natural interest rate or market interest , people save normally as there schedule of saveing because they get a constant rate of interest from their deposit and maintain a stable consumption . But when rate of interest increase , people save more by cutting their consumption becasuse they get more return from investment or deposite in bank so people are willing to cut their consumption to save more. Thus higher rate of interest is an incentive to save more and consume less.