Assume That Households Have Positive Wealth

Multiple Choice

Assume that households have positive wealth. Which of the following explains how the income effect of an interest rate increase affects consumption?

A) As the interest rate increases, the opportunity cost of current consumption falls, and therefore current consumption increases.
B) As the interest rate increases, permanent income increases and future consumption increases.
C) As the interest rate increases, expected future income increases and future consumption increases.
D) As the interest rate increases, nonlabor income increases and current consumption increases.