Asked by victoria burgos on Jun 24, 2024
Verified
A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect outweighs the income effect.
Substitution Effect
The change in demand for a good or service caused by a change in its price, making consumers choose alternatives.
- Identify the differences between substitution and income effects regarding decisions on labor supply and consumption.
Verified Answer
MJ
Megan JohnsonJun 25, 2024
Final Answer :
True
Explanation :
When the interest rate rises, the substitution effect makes saving more attractive because the return on savings is higher, leading individuals to work and save more during their working years and consume more in retirement. If this substitution effect outweighs the income effect (which might make individuals feel wealthier and thus consume more immediately), people will indeed consume more when they are old.
Learning Objectives
- Identify the differences between substitution and income effects regarding decisions on labor supply and consumption.
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