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MicroS06-I.8

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Question from Past Microeconomics Qualifying ExamEdit

Spring 2006 - Section I, Question eight, George Mason University

If expected income growth rises, but current income stays the same, the interest rate will fall.

AnswerEdit

False. If expected income growth rises, we would expect consumers to borrow against their future income, assuming they behave under some sort of consumption smoothing model. The rise in demand for loanable funds will cause the interest rate to increase.

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