Empirical evidence suggests that saving tends to rise when there is an increase in interest rates. What does this imply about the relative sizes of the income and substitution effects? Explain
What will be an ideal response?
The substitution effect must be larger. The substitution effect of an interest rate increase suggests that households will save more because the opportunity cost of spending has increased. The income effect suggests that an increase in the interest rate makes households better off and therefore they will want to spend more. Because saving rises when the interest rate increases, the substitution effect must be larger.
You might also like to view...
A good deal of iron ore is mined in Michigan's Upper Peninsula. What is the relationship between the demand for iron ore and the cost of mining operations in Michigan?
A) Changes in the demand for iron ore are caused directly by changes in the cost of iron mining. B) Changes in the costs of iron mining are caused by changes in the demand for iron ore. C) There is no significant relationship because the demand for iron ore is determined by many different people, while the cost of mining the ore is determined by business executives. D) Nobody knows.
Under what situations will a colluding firm cheat?
What will be an ideal response?
Society's production possibilities frontier
a. helps explain the immense complexity of the real economy b. demonstrates that, although resources are scarce for individuals, there is no problem of scarcity for society as a whole c. is based on unrealistic assumptions and therefore has no value as an economic tool d. is based on simplifying assumptions, but is still useful for illustrating scarcity, opportunity cost, and economic growth e. is based on the assumption that technology is constantly changing
If the wage rate is $5 per hour, regardless of how many laborers are employed, the wage rate equals the
a. MLC b. MPP c. MR d. MRP e. TLC