A rise in the overall level of interest rates results in a greater volume of saving generated in the economy. The foregoing sentence describes the:
A) Income Effect
B) Substitution Effect
C) Wealth Effect
D) Liquidity Effect
E) None of the above

Question

Quizplus · Accepted Answer

The substitution effect refers to the tendency of people to save more when interest rates rise because the opportunity cost of consuming today increases, making saving more attractive.

A Rise in the Overall Level of Interest Rates Results