Suppose Reta Is Planning for Retirement in a Two-Period World

question 216

Multiple Choice

Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the

• A)substitution effect will induce Reta to consume more when she is young.
• B)substitution effect will induce Reta to consume less when she is young.
• C)income effect will induce Reta to consume more when she is young.
• D)change in interest rates affects the substitution effect but not the income effect.

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