4.16 please help and explain 14.16. Savings. The bottom panel of Figure 4.10 depicts the effectof an interest rate decrease on today's consumption (vis-a-vis tomor-row's consumption). Decompose this effect into the substitution andincome components. / (1+ra)f₂/ (1+rb)fb/ (1+ra)f₂/ (1+rb)fbconsumption during retirement (f)babbbbbaACa Cbconsumption during retirementA savingsBBA savingsCb Ca(a) income effectis smaller thansubstitution effectconsumption today (c)(b) income effectis greater thansubstitution effectconsumption todayFIGURE 4.10Effect of a decrease in the interest rate on consumption and savings

The substitution effect refers to the change in consumption patterns that occur because of a change…

4.16. Savings. The bottom panel of Figure 4.10 depicts the effect of an interest rate decrease on today's consumption (vis-a-vis tomor- row's consumption). Decompose this effect into the substitution and income components.

4.16. Savings. The bottom panel of Figure 4.10 depicts the effect of an interest rate decrease on today's consumption (vis-a-vis tomor- row's consumption). Decompose this effect into the substitution and income components.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Question

4.16 please help and explain

14.16. Savings. The bottom panel of Figure 4.10 depicts the effect
of an interest rate decrease on today's consumption (vis-a-vis tomor-
row's consumption). Decompose this effect into the substitution and
income components.

/ (1+ra)
f₂
/ (1+rb)
fb
/ (1+ra)
f₂
/ (1+rb)
fb
consumption during retirement (f)
ba
bb
bb
ba
A
Ca Cb
consumption during retirement
A savings
B
B
A savings
Cb Ca
(a) income effect
is smaller than
substitution effect
consumption today (c)
(b) income effect
is greater than
substitution effect
consumption today
FIGURE 4.10
Effect of a decrease in the interest rate on consumption and savings

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