During an economic expansion due to an increase in technology, A, consumption will:
A)tend to rise due to the income effect.
B)may rise or fall depending on whether the income effect is greater than the substitution effect or not.
C)tend to fall due to the intertemporal substitution effect of the interest rate rising.
D)all of the above.

Question

Quizplus · Accepted Answer

During an economic expansion caused by an increase in technology, consumption tends to rise due to the income effect, as people have more income and are likely to spend more. However, the overall effect on consumption can also depend on the relative strengths of the income effect versus the substitution effect, especially if technological advancements lead to changes in prices or preferences that make saving more attractive than consuming. Additionally, if the expansion leads to higher interest rates (intertemporal substitution effect), it could encourage saving rather than spending, potentially reducing consumption. Thus, all of the provided options are plausible under different circumstances.

During an Economic Expansion Due to an Increase in Technology