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 income effect dominates the substitution effect,an increase in the interest rate on savings is likely to
A)decrease saving.
B)increase saving.
C)have no effect on saving.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

When the income effect dominates the substitution effect, an increase in the interest rate on savings will increase the current income of the individual. This will lead to a decrease in the motivation to save more for retirement as the individual may feel like they have enough to spend during their retirement years. Therefore, they may save less, resulting in a decrease in saving.

Jonathan Is Planning Ahead for Retirement and Must Decide How