1. Explain how income and substitution affect savings decisions in opposing ways. Provide an example to support your argument with detail and integrating the concept of marginal propensity to consumer and marginal propensity to save. Make sure to reply to at least one other student. 2. Explain what is meant by game theory and how it can help us understand strategic behavior; also how it relates to international trade and comparative advantage–be sure to include an example. Make sure to reply to at least one other student.

1. Explain how income and substitution affect savings decisions in opposing ways. Provide an example to support your argument with detail and integrating the concept of marginal propensity to consumer and marginal propensity to save. Make sure to reply to at least one other student.

2. Explain what is meant by game theory and how it can help us understand strategic behavior; also how it relates to international trade and comparative advantage–be sure to include an example. Make sure to reply to at least one other student.

 

 

 

Answer:

In this queation we will be studying about the income and substitution effect of the change in the interest rate which atvthe end effect the savings decision of the individual in opposite manner. First we will understand what is income and substitution effect.

An increase in the interrst rate will have the following two effects on the saving decision.

1. Increased interest rates will make the savings more alluring as an individual will get more interest from the same amount. Therefore he will be willing to increase their saving due to higher interest rate. This is callwd substitution effect, where thw increase in real income due to higher interest rate will induce saving. In other words, his marginal propensity to save increases and he wants to save more of every additional increase in purchasing power.

2. When the increase in interest rate effects the consumption pattern of the individual , it is called the income effect. With the increased interest rates, the disposable income of the individual also increases. Now when he decides to spend this higher real income, his marginal propensity to consume increases and he saves less.therefore income effecy discourages savings.

Thus, both the income and substitution effect work in opposite direction on saving decision.

Asked on February 13, 2018 in economics.
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