When the elasticity of substitution in the constant elasticity of substitution utility function lies above 1, an increase in the interest rate will cause a saver to save less.

Question

Quizplus · Accepted Answer

When the elasticity of substitution is greater than 1, it means consumers are more willing to substitute consumption over time. An increase in the interest rate makes future consumption more attractive, leading to an increase in saving to benefit from the higher returns, not a decrease.

When the Elasticity of Substitution in the Constant Elasticity of Substitution