O'Reilly logo

Macroeconomics by David Tuerck

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 4

Saving

In Chapter 3, we saw that the return to saving r enters into the decision whether to consume or save. There we alluded to the fact that the effect on saving of a rise in the return to saving depends on the relative strength of the substitution and income effects at work.

The substitution effect results from the fact that, with a higher r, the individual finds that each dollar added to saving brings a higher return in the form of increased future consumption than it did before. If r rises from five percent to six percent, the individual gets $1.06 to apply to next year’s consumption for every dollar saved, rather than $1.05. This operates to increase saving.

The income effect results from the fact that an increase in r makes ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required