A change in interest rates would shift the consumption schedule and the saving schedule ______; a change in taxes would shift these two schedules ______.

Question

Quizplus · Accepted Answer

A change in interest rates would shift the consumption schedule and the saving schedule in opposite directions. An increase in interest rates causes saving to become more attractive, so people would save more and consume less, resulting in a shift of the saving schedule to the right and the consumption schedule to the left. On the other hand, a decrease in interest rates would encourage people to borrow and spend more, therefore, moving the consumption schedule to the right and the saving schedule to the left. Taxes, meanwhile, would shift these two schedules in opposite directions. For instance, an increase in taxes would reduce disposable income, causing a decline in consumption and shifting the consumption schedule to the left, while simultaneously increasing saving, implying a move in the saving schedule to the right. Therefore, taxes affect consumption and saving tendencies in opposing directions.

A Change in Interest Rates Would Shift the Consumption Schedule