Calvin 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 substitution effect dominates the income effect, an increase in the interest rate on savings will cause him to
A)increase his savings rate.
B)decrease his savings rate.
C)continue saving at the same rate.
D)Any of the above are possible.

Question

Quizplus · Accepted Answer

When the substitution effect dominates the income effect, an increase in the interest rate makes saving more attractive relative to consumption, leading Calvin to increase his savings rate.

Calvin Is Planning Ahead for Retirement and Must Decide How