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Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus...

Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus increases 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?

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Answer #1

As the consumer confidence in the market is increasing the demand will increase and that will lead to a fall in the inventory, after a fall the firms will produce more at a higher price and the investment in the market will increase.

Increased investment will lead to a higher employment and the income of the people in the economy will be higher and they will demand more money, with the fixed supply of money the interest rate has to be increased to keep the money market in equilibrium.

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