Question

Why does consumption inversely relate to interest rate？ Which formula can show that？

Answer 1

C= c + mpc(Y-T) - iY

Where c is the autonomous consumption spending, Y is income, T are taxes, mpc is marginal propensity to consume, and i is the interest rate.

From the given equation, it can be inferred that consumption depends negatively on interest rate.

An individual with the given level of income, can either consume or save. Saving gets him earn interest income. Higher interest rate means higher interest income. This means that opportunity cost of consumption is higher now which leads to decrease in consumption Spending.