Scenario 21-3 Zach Knows That He Will Ultimately Face Retirement. Assume That

question 62

Multiple Choice

Scenario 21-3
Zach knows that he will ultimately face retirement. Assume that Zach will experience two periods in his life, one in which he works and earns income, and one in which he is retired and earns no income. Zach can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings.
-Refer to Scenario 21-3.If the interest rate on savings increases,

• A) Zach will decrease his savings in the work period if the income effect is greater than the substitution effect for him.
• B) Zach will increase his savings in the work period if the income effect is greater than the substitution effect for him.
• C) Zach will increase his savings in the work period if the substitution effect is greater than the income effect for him.
• D) Both a and c are correct.

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Definitions:

Anna Jacobson Schwartz

An American economist known for her collaborative work with Milton Friedman on the history of monetary policy and banking.

Money Stock

Represents the total quantity of money available in an economy at a specific time, including cash, coins, and balances held in checking and savings accounts.

Economic Activity

The actions that involve the production, distribution, and consumption of goods and services within an economy.

Recession

A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.