Jaelle is planning ahead for retirement and must decide how much to spend and how much to save while she is working in order to have money to spend when she retires.When the income effect dominates the substitution effect,how is an increase in the interest rate likely to influence saving
A)It is likely to decrease saving.
B)It is likely to increase saving.
C)It is likely to increase saving now and decrease saving later.
D)It is likely to decrease saving now and increase saving later.

Question

Quizplus · Accepted Answer

When the income effect dominates the substitution effect, an increase in the interest rate is likely to reduce a person's disposable income, leading them to decrease their consumption and, as a result, also decrease their savings. Therefore, an increase in the interest rate is likely to decrease the amount of money that Jaelle saves.

Jaelle Is Planning Ahead for Retirement and Must Decide How