Jordan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the income effect dominates the substitution effect, an increase in the interest rate on savings will cause him to
A)decrease his savings rate.
B)increase his savings rate.
C)continue saving at the current rate.
D)Any of the above could be correct.

Question

Quizplus · Accepted Answer

When the income effect dominates the substitution effect, Jordan will be more influenced by the change in his current income (rather than the potential future returns on his savings). Therefore, an increase in the interest rate on savings will result in a lower return for his current income, and he may choose to decrease his savings rate in order to increase his current income.

Jordan Is Planning Ahead for Retirement and Must Decide How