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

question 221

Multiple Choice

Suppose Olivia is planning for retirement in a two-period world.In the first period Olivia is young and earns $1 million,and in the second period Olivia is old and retired and earns nothing.The interest rate is initially 10 percent,but then it falls to 7 percent.Which of the following statements is correct?

• A) After the interest rate falls,the substitution effect will induce Olivia to consume more when she is young.
• B) After the interest rate falls,the substitution effect will induce Olivia to consume less when she is young.
• C) After the interest rate falls,the income effect will induce Olivia to consume more when she is young.
• D) A change in interest rates affects the substitution effect but not the income effect.

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