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

question 216

Multiple Choice

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

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

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Definitions:

Contract

A legally binding agreement between two or more parties that outlines obligations each party must fulfill.

Liable

Being legally responsible for something, especially in the context of debts or legal wrongs.

Estoppel

A legal principle that prevents a person from denying or asserting anything to the contrary of what has been established as the truth in legal proceedings.

Principal

Principal refers to a main party to a transaction, contract, or financial instrument, as opposed to an agent who acts on someone else's behalf.