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

Question

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

Quizplus · Accepted Answer

When interest rates increase, people tend to save more rather than spend. This is known as the income effect. However, for young individuals who have a longer time horizon to save, the income effect may not be as strong, and they may still choose to consume more despite the increase in interest rates. Therefore, the best choice is C, which states that young individuals will decrease their savings and increase consumption when interest rates increase.

The Income Effect of an Increase in the Interest Rate