Question

Suppose that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today. This might be interpreted as an upward shift in the consumption function. How does this shift affect investment and the interest rate?

Answer 1

It will affect the investment and the interest rate when people consume more, investments will increase as they buy more products. An increase in consumer confidence would result to an increase in consumption of goods and commodities. The interest rate will higher as the demand for capital also rises and consumer spending rises due to the demand also arises.