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

Question

Quizplus · Accepted Answer

When interest rates decrease, the cost of borrowing decreases, making it easier and cheaper for individuals to make purchases using credit. As a result, individuals are likely to consume more today due to increased affordability. This is known as the substitution effect.

When Interest Rates Decrease, the Substitution Effect Suggests That Individuals