Econ102 notes for Exam II notes: p2 · Suppose you have positive wealth and the interest rate increases. Your non-labor income will increase. So you'll spend more today. If you spend more, you save less. Note that in this case, the substitution effect and the income effect work in opposite directions. Overall, the substation effect is bigger than the income effect. · So, as interest rates increase, we save more and consume less. · So far, we've assumed an unconstrained supply of labor. Think of this as the amount a household would like to work at the current wage if there was work available. · But sometimes, this may not be true. You may face a constrained supply of labor. The amount a household actually works at the current wage. · If you're constrained from working the amount of hours you want to, your consumption goes down. · When the economy is in a recession, and there's unemployment, you can't work as much and your income is outside your control. You only control consumption, so when
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