The substitution effect of an increase in the interest rate will result in an increase in
A)consumption when young and increase in savings when young.
B)consumption when old and an increase in savings when young.
C)consumption when young and an increase in savings when old.
D)savings when old and an increase in consumption when old.

Question

Quizplus · Accepted Answer

The substitution effect of an increase in the interest rate encourages individuals to save more when young to take advantage of higher returns, leading to increased consumption when old due to the accumulated savings.

The Substitution Effect of an Increase in the Interest Rate