During an economic expansion due to an increase in technology, A, consumption will:
A)tend to fall 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 rise due to the intertemporal substitution effect of the interest rate rising.
D)all of the above.

Question

Quizplus · Accepted Answer

The answer cannot be A or C, as they give contradictory predictions. The income effect in A would imply a decrease in consumption, while the intertemporal substitution effect in C would imply an increase in consumption. Therefore, B, which states that consumption may rise or fall depending on the relative magnitude of the income and substitution effects, is the most plausible option. In an economic expansion, people have more income to spend, which might increase consumption, but at the same time, they might feel wealthier and save more, leading to a decrease in consumption. The relative strength of these effects will depend on various individual and structural factors, such as tastes, prices, preferences, and the overall economic environment.

During an Economic Expansion Due to an Increase in Technology