A common belief is that when a country’s central bank, such as the Bank of Canada or the Bank of Japan, wants to reduce or slow the increase in overall spending, it raises the real rate of interest.

a) Explain how raising the real rate of interest affects consumption spending.

b) Explain how raising the real rate of interest affects investment spending.

c) Explain how raising the real rate of interest affects government spending.

d) Explain how raising the real rate of interest affects net exports.

e) Given what you know about how GDP is constructed, how will this policy affect the overall level of income in the economy?