The demonstration effect suggests that people will save less when they
A. control their spending in order to save more when the real interest rate increases.
B. recognize that the real interest rate has increased.
C. base their spending decisions (and consequently their saving decisions) on spending decisions of others who spend more than they do.
D. base their saving decisions on their projections of income and spending needs over their lifetime.
Answer: C
You might also like to view...
The long-run supply curve for a competitive industry
a. may be horizontal if entry into the industry lowers average total cost. b. may be upward-sloping if higher-cost firms enter the industry. c. will be horizontal if there is free entry into the industry. d. will be upward-sloping if there are barriers to entry into the industry.
Suppose that Cathy spends all of her income on 20 units of good X and 25 units of good Y. Cathy's marginal utility from the 20th unit of good X is 9 utils, and her marginal utility from the 25th unit of good Y is 19 utils. If the price of good X is $0.50 per unit and the price of good Y is $1.00 per unit, then to comply with the rational spending rule, Cathy should:
A. purchase more than 20 units of good X and more than 25 units of good Y. B. purchase more than 20 units of good X and less than 25 units of Y. C. continue to purchase 20 units of good X and 25 units of good Y. D. purchase less than 20 units of good X and more than 25 units of good Y.