Question 53
Within the AD/AS model, if consumers increase their savings and cut back on their spending, the
(1) real interest rate will increase because of the higher rate of saving.
(2) real interest rate will decrease and, thereby, cushion the reduction in consumption
(3) Iong-run aggregate supply will decrease to restore equilibrium.
(4) natural rate of unemployment will increase.

When consumers decide to save more and cut their spending, it leads to a decrease in overall demand for goods and services. As a result, businesses may find themselves with excess inventory and reduced revenue, which can lead to lower production rates and potential layoffs in the short run. This phenomenon can actually trigger a downward adjustment in real interest rates as lenders seek to stimulate borrowing and spending again.

Additionally, this shift in consumer behavior can also have significant implications for the economy. It might push policymakers to implement measures like tax incentives or increased government spending to revive consumer confidence and stimulate demand. The economy tends to react dynamically to consumer habits, making this an interesting cycle to observe!