Changes in Interest Rates Result in Both an Income Effect

question 3

Essay

Changes in interest rates result in both an income effect and a substitution effect. What does the empirical evidence suggest about their relative strengths? Morever, what is the likely effect on consumption? You may also wish to comment on what is happening to the income effect over time and what is driving this change.

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Definitions:

Parental Investment

Any contribution by a parent to an individual offspring that increases the offspring's chance of surviving at the cost of the parent's ability to invest in other offspring.

Surviving Offspring

Refers to the offspring of an organism that live past infancy and are able to potentially reproduce themselves.

Sexual Loyalty

The dedication or faithful adherence to a sexual partner, often within the context of a romantic or committed relationship.

Evolutionary Perspective

is a theoretical approach in psychology that seeks to explain useful mental and psychological traits—such as memory, perception, or language—as adaptations, i.e., as the functional products of natural selection.