If Suzette Responds to an Increase in the Interest Rate

question 538

Multiple Choice

If Suzette responds to an increase in the interest rate by decreasing her saving, then, for Suzette,

• A)the increase in the interest rate creates an income effect that is greater than the substitution effect.
• B)the increase in the interest rate creates a substitution effect that is greater than the income effect.
• C)consumption when young and consumption when old are perfect substitutes.
• D)consumption when young and consumption when old are perfect complements.

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Definitions:

Substitution Effect

The adjustment in how consumers spend due to differences in the prices between goods, leading to the substitution of one product for another.

Inferior Good

A type of good whose demand decreases when consumer income rises, unlike normal goods, which have a positive correlation with income.

Normal Good

A type of good for which demand increases as the income of the consumer increases, showing a positive relationship between income and demand.

Demand Function

A mathematical formula that describes the relationship between the quantity of a good or service demanded and its price, along with other factors like income and the prices of related goods.