The tendency to reduce current consumption and increase future consumption as the real interest rate increases is called
A)the substitution effect of the real interest rate on saving.
B)the income effect of the real interest rate on saving.
C)the net effect of the real interest rate on saving.
D)the substitution effect of the real interest rate on investment.

Question

Quizplus · Accepted Answer

The tendency to reduce current consumption and increase future consumption as the real interest rate increases is known as the substitution effect of the real interest rate on saving. This happens because higher real interest rates increase the opportunity cost of current consumption, encouraging people to save more for the future. The income effect refers to the change in consumption due to a change in income, which is not relevant in this scenario. The net effect is not a commonly used term in this context, and the substitution effect of the real interest rate on investment is not relevant to this question.

The Tendency to Reduce Current Consumption and Increase Future Consumption