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:

Credit Analysis

The process of evaluating an applicant's loan request or a corporation's debt issue in order to determine the likelihood of the borrower repaying the loan.

Financial Statement

A written report which quantitatively describes the financial health of a company.

Commercial Paper

An unsecured, short-term debt instrument issued by a company, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.

Short-term Notes

Debt obligations that are due for repayment within a short period, typically less than one year.