The so-called substitution effect suggests there is a negative relationship between changes in interest rates and changes in the volume of savings.

Question

Quizplus · Accepted Answer

The substitution effect actually suggests that as interest rates increase, people are more likely to save rather than spend, because the opportunity cost of spending (foregoing the interest income) is higher. Conversely, when interest rates decrease, people are less incentivized to save.

The So-Called Substitution Effect Suggests There Is a Negative Relationship