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:

Agreement

A mutual understanding or arrangement between two or more parties, often formalized by a contract or other legal document.

Majority

The greater part or number; the number greater than half the total.

Prejudice

Preconceived opinion or bias against an individual or group without sufficient knowledge, thought, or reason.

Negative Stereotype

An oversimplified and widely held fixed idea or image of a particular type of person or thing, which is often negative and prejudicial.