What effects does a higher rate of return have on saving?
A) A higher rate of return has an income effect that discourages saving and a substitution effect that encourages saving.
B) A higher rate of return has an income effect that encourages saving and a substitution effect that discourages saving.
C) A higher rate of return has income and substitution effects that both decrease saving.
D) A higher rate of return has income and substitution effects that both increase saving.

Question

Quizplus · Accepted Answer

A higher rate of return increases the reward for saving, which is the substitution effect that encourages more saving. However, it also increases the income of savers, which is the income effect, potentially allowing them to reach their saving goals with less saving, thus discouraging saving.

What Effects Does a Higher Rate of Return Have on Saving