Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings.Which of the following would be true?
A)Both the income effect and the substitution effect would tend to increase the amount of money a household saved.
B)The income effect would tend to increase household savings while the substitution effect would tend to decrease household savings.
C)The income effect would tend to decrease household savings while the substitution effect would tend to increase household savings.
D)Both the income effect and the substitution effect would tend to decrease the amount of money a household saved.

Question

Quizplus · Accepted Answer

The income effect suggests that with higher returns, households may feel wealthier and choose to save less, while the substitution effect suggests that higher returns make saving more attractive compared to consumption, thus increasing savings.

Suppose Tax Laws Were Reformed to Encourage Saving by Increasing