Question from Past Microeconomics Qualifying Exam[]

Spring 2005 - Section I, Question six, George Mason University

T,F,U. State first whether the following statements are true, false or uncertain. Then briefly explain your resaoning in four or five sentences. You may sue a graph if it helps clairify your answer.

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


False. If expected income growth rises people will demand more money today. To smoothen their consumption they will take out loans that they will repay with their higher income in the future. The interest rate will rise due to the increased demand for money.

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