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Please explain this question:
10.4 (0) Decide whether each of the following statements is true or
false. Then explain why your answer is correct, based on the Slutsky
decomposition into income and substitution effects.
(a) “If both current and future consumption are normal goods, an increase
in the interest rate will necessarily make a saver save more.” False.
Substitution effect makes him consume less
in period 1 and save more.
Ans:For a saver,
income effect works in opposite direction.
Either effect could dominate.
(b) “If both current and future consumption are normal goods, an in-
crease in the interest rate will necessarily make a saver choose more
consumption in the second period.”
Ans: True. The income
and substitution effects both lead to more
consumption in the second period.
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