What are the two channels through which an increase in the real interest rate affects consumption decisions? Can we tell which channel has a larger impact in theory? In practice, which channel has a larger impact?
There are two channels thrrough which increase in real interest impacts consumption decision:
a. Direct Channel- There exists an indirect relationship between rate of interest in the economy and level of consumption decision. As rate of interest increases, consumption expenditure falls and as rate of interest decreases, the level of consumption expenditure increases.
b. Indirect Channel: An increase in the real interest rate increase the level of savings in the economy because savings are positively related to rate of interest. As savngs increases, Consumption = Disposable Income - Savings, will decrease because income if assumed to be fixed. Thus, increase in real interest rate leads to fall in consumption expenditure in the economy.
In practice, indirect channel has a greater impact because real rate of interest directly impacts National Savings which in turn impacts consumption expenditure in the economy.
What are the two channels through which an increase in the real interest rate affects consumption...
Describe the effect of an increase in the real interest rate on current and future consumption for a borrower in the two period model. Explain using the Substitution Effect and the Income Effect.
Describe the channels by which monetary policy ripples through the economy and explain how each channel operates. Suppose the Bank of Canada raises the overnight loans rate. When the Bank of Canada raises the overnight loans rate, it makes an open market Other short-term interest rates and the exchange rate rise. The quantity of money and the supply of loanable funds decrease The long-term real interest rate rises The higher real interest rate decreases consumption expenditure and investment. The exchange...
3. Explain how an increase in government spending affects real interest rate, money demand and the general price level in the long run.
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Question 100In an open economy with flexible exchange rates, monetary policy affects Not yet answered through changes in the real interest rate and affectsthrough changes in the Points out of 1.00 exchange rate. r Remove flag Select one: A. Consumption and investment; net exports O B. net exports; taxes and saving o c. productivity and growth; consumption O D. taxes and saving; net exports Question 100In an open economy with flexible exchange rates, monetary policy affects Not yet answered through...
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An increase in the real interest rate leads to were we it lead
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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...
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