A reduction in real interest rates will cause the demand for new homes to

a.increase, which results in an increase in investment expenditures.

b.increase, which results in an increase in consumption expenditures.

c.decrease, which results in a decrease in investment expenditures.

d.decrease, which results in a decrease in consumption expenditures.e.increase, which will result in an increase in business fixed investment.

Solutions

Expert Solution

The answer is (a)

As the real interest rate falls, it is cheaper to borrow money in order to purchase a new house. Thus, the demand for new homes will increase. The purchase of housing is considered as an investment in GDP and thus, it will result in an increase in investment expenditures.

All other options are wrong as demand for new homes does not decrease and it is not a fixed business investment.

Rahul Sunny answered 2 years ago

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