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

Question

Quizplus · Accepted Answer

When the substitution effect dominates the income effect, an increase in the interest rate makes saving more attractive compared to spending because the opportunity cost of consuming now (instead of saving) increases. Therefore, Jonathan is likely to save more.

Jonathan Is Planning Ahead for Retirement and Must Decide How