An increase in the rate of interest causes consumers to save due to the substitution effect, and save__________ due to the income effect.

Question

Quizplus · Accepted Answer

The substitution effect of an increase in interest rates encourages saving more because the return on savings is higher. However, the income effect may lead to saving less because consumers feel wealthier and may choose to consume more.

An Increase in the Rate of Interest Causes Consumers to Save