Because of the income and substitution effects, a higher interest rate ________ current consumption and _______ current saving of a consumer.

Question

Quizplus · Accepted Answer

The impact of a higher interest rate on current consumption and saving is uncertain due to the income and substitution effects. The substitution effect might encourage saving by making future consumption more attractive, while the income effect could either increase or decrease current consumption depending on whether the consumer is a net saver or borrower.

Because of the Income and Substitution Effects, a Higher Interest