If Suzette responds to an increase in the interest rate by decreasing her saving, then, for Suzette,
A)the increase in the interest rate creates an income effect that is greater than the substitution effect.
B)the increase in the interest rate creates a substitution effect that is greater than the income effect.
C)consumption when young and consumption when old are perfect substitutes.
D)consumption when young and consumption when old are perfect complements.

Question

Quizplus · Accepted Answer

When the interest rate increases, the substitution effect would typically encourage more saving because the return on savings is higher. However, if Suzette decreases her saving, it suggests that the income effect (feeling wealthier due to higher future income from interest) is stronger, leading her to consume more now rather than save.

If Suzette Responds to an Increase in the Interest Rate