If the substitution effect is greater than the income effect, a decrease in interest rates will
A) increase saving and decrease consumption spending by households.
B) decrease saving and increase consumption spending by households.
C) decrease both saving and consumption spending by households.
D) increase both saving and consumption spending by households.

Question

Quizplus · Accepted Answer

When the substitution effect is greater than the income effect, lower interest rates will make savings comparatively less attractive than consumption, so households will decrease their savings and increase their consumption spending.

If the Substitution Effect Is Greater Than the Income Effect