If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving,then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving,for someone who's a lender.
A)fall; fall
B)fall; rise
C)rise; rise
D)rise; fall

Question

Quizplus · Accepted Answer

If the substitution effect is smaller than the income effect, then the individual is more likely to respond to changes in income than changes in the interest rate. As a result, a rise in the real interest rate will lead to an increase in income, which will lead to an increase in consumption. However, as the individual is a lender, they will also increase their savings in response to the increase in the real interest rate. Therefore, consumption will rise, but savings will fall.

If the Substitution Effect of the Real Interest Rate on Saving