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,how is an increase in the interest rate likely to influence saving
A)It is likely to increase saving.
B)It is likely to decrease saving.
C)It is likely to increase saving now and decrease saving later.
D)It is likely to decrease saving now and increase saving later.

Question

Quizplus · Accepted Answer

When the substitution effect dominates the income effect, an increase in the interest rate will make saving more attractive than current consumption, leading individuals to save more in order to increase future consumption. Therefore, an increase in the interest rate is likely to increase saving.

Jonathan Is Planning Ahead for Retirement and Must Decide How