Suppose the real interest rate has increased from 2 to 4 percent.
a. What will happen to the opportunity cost of consuming a set of goods today, as opposed to tomorrow? Explain how this will affect the fraction of income you choose to save.
b. Now suppose that you save only to finance your retirement and that your goal is to have $1 million tucked away by the time you're 70. Explain how your rate of saving will respond to the rise in the interest rate in this context.
c. Can you make a prediction regarding the net effect of this increase in r on the rate of saving? Why, or why not?