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A household that is a net borrower owes more money to its creditors than it has saved or has lent out to other entities. If there is an increase in interest rates in an economy, then what will happen to the consumption of the households in that economy that are net borrowers?

A household that is a net borrower owes more money to its creditors than it has saved or has lent out to other entities. If there is an increase in interest rates in an economy, then what will happen to the consumption of the households in that economy that are net borrowers?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A household that is a net borrower owes more money to its creditors than it has saved or has lent out to other entities. If there is an increase in interest rates in an economy, then what will happen to the consumption of the households in that economy that are net borrowers? Both the income and substitution effects will drive their current consumption down. The income effect will drive their current consumption up and the substitution effect will keep it unchanged. Both the income and substitution effects will drive their current consumption higher. The income effect will drive their current consumption down, but the substitution effect will drive it up. The income effect will drive their current consumption up, but the substitution effect will drive it down.
Transcribed Image Text:A household that is a net borrower owes more money to its creditors than it has saved or has lent out to other entities. If there is an increase in interest rates in an economy, then what will happen to the consumption of the households in that economy that are net borrowers? Both the income and substitution effects will drive their current consumption down. The income effect will drive their current consumption up and the substitution effect will keep it unchanged. Both the income and substitution effects will drive their current consumption higher. The income effect will drive their current consumption down, but the substitution effect will drive it up. The income effect will drive their current consumption up, but the substitution effect will drive it down.
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