Question

The substitution effect causes a borrower to increase private savings as interest rates rise, and it...

The substitution effect causes a borrower to increase private savings as interest rates rise, and it causes the same effect on a lender. True/False.

Homework Answers

Answer #1

Answer- False

''The substitution effect causes a borrower to increase private savings as interest rates rise, and it causes the same effect on a lender'', this statement is false. Because borrowers are worse off with a high interest rates, as a result of high interest rates may lead to consumers to increase savings and lenders are better off with a high interest rates, as a result of high interest rates a lender can earn more. The substitution effect does not have the same effect on the borrowers and lenders. .

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