please help me with my economics homeworks..
Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he’s working in order to have money to spend when he retires. When the substitution effect dominates the income effect, an increase in the interest rate on savings is likely to
C.have no effect on saving.
D.All of the above are possible.
Substitution Effect—the change in demand resulting from
a change in the price ratio, leaving utility unchanged.
Income Effect—the change in demand resulting from the
change in purchasing power (movement from the initial
indifference curve to the final indifference curve), leaving
the price ratio unchanged.
All substitution effect; income effect is negligible. It is
not that people will save a chunk of money. Rather,
changing prices provides the incentive to save more.
I would think that the answer would be A.
Hope this helps.