Holding income constant, if consumers and investors decide to spend more on goods and services, then

Consumers and Investors Spending: Impact on Economy and Markets

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Question

Holding income constant, if consumers and investors decide to spend more on goods and services, then

Answers

A. additional spending will require increased borrowing (or less saving), which will drive up the real rate of interest.

B. producers will expand output without increasing prices to accommodate the stronger demand.

C. additional spending will increase the supply of loanable funds, which will reduce the real interest rate and thereby trigger additional spending.

D. the economy's long-run capacity (LRAS) will expand to accommodate the stronger demand.

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Explanations

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A. B. C. D.

Strong aggregate demand will put pressure on the market for loanable funds and will result in higher interest rates (as the demand for funds increases). This will cause aggregate demand to contract from its heightened state. This adjustment represents one of the economy's self-correcting mechanisms.

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