When interest rates increase, the substitution effect suggests that individuals will
A) consume less today.
B) save less today.
C) consume less in the future.
D) save more and consume more today.

Question

Quizplus · Accepted Answer

The substitution effect implies that as interest rates increase, saving becomes more attractive compared to consuming because the return on savings is higher. Therefore, individuals are likely to consume less today to save more for the future.

When Interest Rates Increase, the Substitution Effect Suggests That Individuals