APFIVE Real Interest Rates and Aggregate Demand
If real interest rates increase due to higher demand for loans during expansionary policy, what is the most likely effect on the components of aggregate demand?
A
Rising real interest rates directly reduce savings, causing an increase in net exports and a rightward shift in aggregate demand.
B
Higher real interest rates boost consumer optimism and thereby increase consumption and aggregate demand.
C
Higher real interest rates increase borrowing costs, leading to reduced investment spending and a leftward shift in aggregate demand.
D
Increased real interest rates have no significant impact on investment spending since they only affect long-term government bonds.
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