Scenario 21-3
Zach knows that he will ultimately face retirement. Assume that Zach will experience two periods in his life, one in which he works and earns income, and one in which he is retired and earns no income. Zach can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings.
-Refer to Scenario 21-3.If the interest rate on savings increases,it is possible that
A) Zach will decrease his savings in the work period.
B) Zach will increase his savings in the work period.
C) Zach will not change his consumption in the work period.
D) All of the above are possible.

Question

Quizplus · Accepted Answer

An increase in the interest rate can lead to different behaviors: Zach might save less if he wants to maintain the same retirement income (income effect), save more to take advantage of higher returns (substitution effect), or keep his consumption unchanged if these effects offset each other.

Scenario 21-3 Zach Knows That He Will Ultimately Face Retirement. Assume That