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21 June, 10:39

The substitution effect of a higher real interest rate on consumption causes A. investment to decline. B. consumers to substitute away from future consumption. C. consumers to substitute away from current consumption. D. no effect on current or future consumption.

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  1. 21 June, 10:53
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    C. consumers to substitute away from current consumption.

    Explanation:

    When there is an increase in real interest current consumption tends to reduce. And because goods are more expensive there is substitution away from. Current consumption. Consumers subsititute to future consumption which is cheaper than the current one.

    Effect of increase on borrowers results reduction in current consumption and increase in current savings because they are more poor.
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