Answer to Question #96300 in Microeconomics for Kammi

Question

The us government is considering to increase the market interest rate.how will it affect People's present consumption and present saving?

Answer 1

Due to increase in rate of interest, it becomes incentivizing for the consumer to consume less today so that he could gain more in future by saving in present. They would gain higher returns for the savings that are done in present after the rate of interest increases. The opportunity cost of consuming today would be higher due to which the consumer will save more of its income as savings to earn higher rate of interest which could be consumed in future. And also, they will borrow less as they need to give more interest rate compared to before for the same amount of loan they take. So, with the US govt. increasing the rate of interest, the present consumption of people will decrease and private savings will increase.