The income and substitution effects move in ________ for lenders and in ________ for borrowers.
A) the same direction; the same direction
B) the same direction; opposite directions
C) opposite directions; the same direction
D) opposite directions; opposite directions

Question

Quizplus · Accepted Answer

The income effect for lenders is that higher interest rates increase their interest income, leading to an increase in their purchasing power. This result is opposite for borrowers because the higher interest rate reduces their disposable income, which reduces their purchasing power. The substitution effect for both lenders and borrowers is the same, as higher interest rates create an incentive for lending and borrowing, respectively. Therefore, the income and substitution effects move in opposite directions for lenders and in the same direction for borrowers.

The Income and Substitution Effects Move in ________ for Lenders