Suppose that the interest rate is 12% and that the representative agents tastes are such that the

Question:

Suppose that the interest rate is 12% and that the representative agent’s tastes are such that the interest rate would have to rise to 20% to get him to voluntarily cut current consumption by $1,000. Suppose now that there is a war that destroys $1,000 worth of consumption goods for every agent in the economy. True or False: The interest rate must rise to 20% to restore equilibrium.