When Interest Rates Decrease, the Substitution Effect Suggests That Individuals

question 179

Multiple Choice

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.

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Definitions:

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Great Recession

The severe global economic downturn that took place from late 2007 through early 2009, marked by significant declines in consumer wealth, financial markets, and economic activity worldwide.

Profits

The financial gain that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity.

Price Ceiling

A legal maximum price that can be charged for a product or service, often set by government to control costs for consumers.