Question #7
Reading: Reading 39 Economics and Investment Markets
PDF File: Reading 39 Economics and Investment Markets.pdf
Page: 2
Status: Correct
Correct Answer: A
Question
A high default-free interest rate is most likely to be associated with:
Answer Choices:
A. investors attaching high utility to future consumption relative to current consumption
B. expectations of higher income in the future
Explanation
An increase in real GDP growth means that more goods and services will be available in
the future relative to today. Investors will be less willing to substitute across time, leading
to more borrowing and less saving. This leads to an increase in the real default-free
interest rate.