Assume That the Substitution Effect Is Large Relative to the Income

question 92

Multiple Choice

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

• A) It increases the interest rate and decreases spending on capital goods.
• B) It increases the interest rate and increases spending on capital goods.
• C) It decreases the interest rate and increases spending on capital goods.
• D) It decreases the interest rate and decreases spending on capital goods.

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Definitions:

Consumer Desire

The want for goods, services, or experiences that can provide satisfaction or utility to the consumer.

Profits of Industry

The total earnings of companies within a specific sector after subtracting costs and expenses.

Resources Employed

Refers to the allocation and utilization of resources such as labor, capital, and materials to produce goods and services.

Output of Industry

The total amount of goods and services produced by an industry or sector within a specific period, often used to gauge economic health and productivity.