Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working to have money to spend when he retires.When the income effect dominates the substitution effect, an increase in the interest rate on his savings is likely to:
A)increase his saving
B)decrease his saving
C)have no effect on his saving
D)all of the above are possible

Question

Quizplus · Accepted Answer

When the income effect dominates the substitution effect, an increase in the interest rate will decrease Jonathan's saving because he will be earning more on his savings, which will increase his income and his inclination to spend.

Jonathan Is Planning Ahead for Retirement and Must Decide How