Assume That the Substitution Effect Is Large Relative to the Income

Multiple Choice

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

A) It increases the interest rate and decreases spending on capital goods.
B) It increases the interest rate and increases spending on capital goods.
C) It decreases the interest rate and increases spending on capital goods.
D) It decreases the interest rate and decreases spending on capital goods.