A higher rate of return on saving has
A)an income effect that discourages saving and a substitution effect that encourages saving.
B)an income effect that encourages saving and a substitution effect that discourages saving.
C)income and substitution effects that both decrease saving.
D)income and substitution effects that both increase saving.

Question

Quizplus · Accepted Answer

A higher rate of return on saving increases the opportunity cost of consuming now rather than saving, which is the substitution effect that encourages saving. However, it also means that individuals can achieve their savings goals with less saving, which is the income effect that discourages saving.

A Higher Rate of Return on Saving Has