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

question 170

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 generate a substitution effect but not an income effect.

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