A Lower Return and What It Does to Saving

Quentin can spend now or save and spend later. The line's slope is the rate of return: at first each dollar not spent today brings back $1.80 tomorrow, and he chooses A, $6,000 now and $7,200 later. When the return falls the line pivots in from the same corner and he chooses B, $7,000 now and $3,900 later.

Two things happened. Saving now buys less future consumption, so the substitution effect pushes him toward spending today, from A to C. But the lower return has also made him poorer overall, and the income effect pushes him toward less of both, from C to B. Here substitution wins and he saves less. Points D and F are where someone with different preferences might land on the same new line. The slider sets the new rate of return.