Scenario 21-3
Diane knows that she will ultimately face retirement.Assume that Diane will experience two periods in her life,one in which she works and earns income,and one in which she is retired and earns no income.Diane can earn $250,000 during her working period and nothing in her retirement period.She must both save and consume in her work period with an interest rate of 10 percent on savings.
-Refer to Scenario 21-3.If the interest rate on savings increases,

Question

Quizplus · Accepted Answer

The substitution effect suggests that Diane will save more when the interest rate increases, while the income effect suggests that she will save less. If the substitution effect is greater than the income effect, Diane will increase her savings in the work period.

Scenario 21-3 Diane Knows That She Will Ultimately Face Retirement.Assume That Diane