Explain the income and substitution effects of an increase in the interest rate on savings
What will be an ideal response?
If the interest rate rises, the substitution effect will lead to an increase in saving because the relative cost of current consumption increases. The income effect will cause a decrease in saving because it will require less saving today to reach the target consumption level in the future. Therefore, the effect of an increase in the interest rate on saving is indeterminate.
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A competitive environment penalizes the inefficient use of resources. All but one of the following statements addresses why competition is so important for an efficient outcome. Which statement is not true?
a. Competition drives the price closer to the marginal cost of production. b. Consolidation leads to concentration of market power that allows providers to act like monopolists and price their products above marginal cost. c. Competition forces firms to improve efficiency or lose profits. d. More firms competing in a market means more substitutes, so consumers have more options, and their demand is less elastic.
A simple economy is characterised by the following equations: Ct= 200 + 0.5Yt, It = 3(Yt? Yt -1)and Y0=10,000 Write the national income equation as a difference equation in Y