Final answer:
A decline in real interest rates leads to an increase in borrowing and spending due to lower borrowing costs, stimulating economic activity. However, if such a decline is due to government tactics managing high deficits leading to higher inflation, it may decrease long-term economic growth and confidence.
Step-by-step explanation:
When there is a decline in the real interest rate, it generally leads to an increase in borrowing and spending. This is because as the cost of borrowing funds decreases, both individuals and businesses are more likely to take out loans for consumption and investment. Lower real interest rates reduce the cost associated with financing various forms of spending, such as purchasing a home or investing in new business equipment, thus encouraging economic activity.
However, context matters, as mentioned in the given reference material. While a decline in real interest rates can stimulate borrowing and spending in the short term, if the decline is a result of government strategies to manage high government deficits by letting inflation rise above the fixed borrowing rate, this might eventually lead to decreased consumer and business confidence. It can also pull resources away from domestic investment that is essential for long-term economic growth.