microbook_3e-page68

microbook_3e-page68 - households earn more on all previous...

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Saving and Borrowing Present vs. Future Consumption Households can use present income to finance future spending (that is: save), or they can use future funds to finance present spending (that is: borrow). Income & Substitution Effects of Higher Interest Rate Income Effect When the interest rate rises,
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Unformatted text preview: households earn more on all previous savings, so the income effect encourages households to save less. Substitution Effect When the interest rate rises, the relative price of present consumption rises, so the substitution effect encourages households to save more. Page 68...
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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