Empirical evidence suggests that saving tends to rise when there ...

[Zoey63294]

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?

Question 2

Markets promote
 
  A) competition and voluntary exchange. B) equity and competition.
  C) equity and equality. D) voluntary exchange and equality.

[Carissamariew]

Answer to Question 1

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.

Answer to Question 2

A