In the Fisher two-period model, if the consumer is a saver, consumption in periods one and two are normal goods, and the income effect of an increase in interest rate is greater than the substitution effect, then saving:
A) will increase.
B) will decrease.
C) will not change.
D) may either increase or decrease.

Question

Quizplus · Accepted Answer

In this scenario, an increase in interest rates leads to a decrease in consumption in both periods (substitution effect) and a decrease in total income (income effect), which amplifies the effect towards lower consumption. Since consumption decreases, saving, which is the difference between income and consumption, will decrease as well. Therefore, the correct choice is B) will decrease.

In the Fisher Two-Period Model, If the Consumer Is a Saver