Assume households have positive wealth. If the income effect is ________ the substitution effect, a decrease in interest rates will increase saving and decrease consumption spending by households.

Question

Quizplus · Accepted Answer

If the income effect is greater than the substitution effect, a decrease in interest rates will result in an increase in real income, which leads to additional consumption. However, this increase in income may also result in additional saving, depending on the specific preferences of households. Therefore, if the income effect is greater than the substitution effect, an increase in interest rates will lead to a decrease in real income, thus decreasing consumption spending and increasing saving.

Assume Households Have Positive Wealth