question archive An increase in the real interest rate will _____ PAE and will cause the PAE function to shift _____
An increase in the real interest rate will _____ PAE and will cause the PAE function to shift _____
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An increase in the real interest rate will _____ PAE and will cause the PAE function to shift _____.
A. increase; inward
B. increase; outward
C. decrease; inward
D. decrease; outward
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The correct option is C. decrease; inward
Explanation: Planned aggregate expenditure explains the overall spending that is expected from various sectors such as households, firms and government in a specific time period. It is explained by the 45-degree line graphically. The increased interest rate will encourage people to save more money in their deposit accounts to earn higher interest income. It will reduce the consumption level in the economy. As a result, decreases the PAE and shifts the PAE function inward.
