Jake faces tradeoffs between consuming in the current period when he is young and consuming in a future period when he is old.Jake experiences a decrease in the current interest rate he earns on his savings.Jake will save
A) less in the current period if the substitution effect is greater than the income effect.
B) less in the current period if the income effect is greater than the substitution effect.
C) more in the current period if the substitution effect is greater than the income effect.
D) more in the current period,regardless of the sizes of the income and substitution effects.

Question

Quizplus · Accepted Answer

If the substitution effect is greater than the income effect, Jake will save less because the lower interest rate makes future consumption relatively more expensive compared to current consumption.

Jake Faces Tradeoffs Between Consuming in the Current Period When