The effect of an increase in interest rates on current consumption is
A) positive among borrowers if the income effect is dominant
B) positive among borrowers if the substitution effect is dominant
C) positive among savers if the income effect is dominant
D) positive among savers if the substitution effect is dominant
E) strongly positive in the aggregate consumption data

Question

Quizplus · Accepted Answer

DWhen interest rates increase, savers are likely to see a positive effect on their consumption if the income effect is dominant (C), because they earn more on their savings, increasing their overall income and potentially their consumption. On the other hand, if the substitution effect is dominant (D), savers might also consume more now rather than save, as the higher interest rates make future consumption more attractive relative to current consumption, encouraging saving over spending now.

The Effect of an Increase in Interest Rates on Current