Which of the following two effects of a decrease in the tax rate on saving would raise savings?
A)the income effect and the substitution effect
B)the income effect but not the substitution effect
C)the substitution effect but not the income effect
D)neither the substitution effect nor the income effect

Question

Quizplus · Accepted Answer

A decrease in the tax rate on saving makes saving more attractive relative to consumption, leading to the substitution effect, which encourages more saving. The income effect, however, might lead to less saving as individuals feel wealthier and may choose to consume more.

Which of the Following Two Effects of a Decrease in the Tax