Assuming That the Substitution Effect Is Large Relative to the Income

question 9

Multiple Choice

Assuming that the substitution effect is large relative to the income effect,tax reform designed to increase saving

• A)increases the interest rate and decreases spending on capital goods.
• B)increases the interest rate and increases spending on capital goods.
• C)decreases the interest rate and increases spending on capital goods.
• D)decreases the interest rate and decreases spending on capital goods.

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Definitions:

Incompatible Goals

Objectives that cannot be achieved simultaneously because they conflict with one another.

Approach-avoidance Conflict

A psychological struggle experienced when an individual is attracted to and repelled by the same goal or decision at the same time.

Personal Time

Time allocated for individual pursuits, rest, or leisure that is not dedicated to work-related activities.

Conflict

A situation or process resulting from the perceived or actual opposition of needs, values, and interests between people.