Describe the effect of an increase in the real interest rate on current and future consumption...
Describe the effect of an increase in the real interest rate on current and future consumption for a borrower in the two period model. Explain using the Substitution Effect and the Income Effect.
Homework Answers
A rise in the real interest rate in the market reduces the relative price of future consumption goods in regard to the current consumption products, thus causes to both income and substitution effects. A rise in the real interest rate causes a rise in future consumption for lender while current consumption decreases for a borrower. In the enclosed graph-1 an increase in the real interest rate causes substitution effect for lender by moving from A to D and income effect for lender by moving from D to B. In the enclosed graph-2 for a borrower the substitution effect is from moving from A to D and income effect by moving from D to B
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Describe the effect of an increase in the real interest rate on
current and future consumption...
1) If the substitution effect of the real interest rate on saving is smaller than the...
1) If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving, then a rise in the real interest rate leads to a in consumption and a_ _in saving, for someone who's a lender (saver). A) fall; fall B) fall; rise C) rise; fall D) rise, rise 2) For a borrower, an increase in the real interest rate will lead to A) higher current consumption and less...
If current and future consumption are both normal goods, in increase in the interest rate will...
If current and future consumption are both normal goods, in increase in the interest rate will necessarily 1. cause savers to save more. 2. cause borrowers to borrow less. 3. reduce everyone's current consumption. 4. make everyone worse off. 5. None of the above. (Please show your answer and describe the reasons)
5 In the intertemporal model, the real interest rate increases, the following statement is wrong ()...
5 In the intertemporal model, the real interest rate increases, the following statement is wrong () A budget constraint line is steeper B Consumer endowment points change C. The present value of the consumer ’s lifetime wealth decreases D consumers will increase current consumption 6 In the intertemporal model, the effect of increasing real interest rates on lenders is () A Current consumption increases, future consumption increases B. Current consumption decreases, future consumption increases C Current consumption is uncertain, and...
2.Consider the inter-temporal model of consumption studied in class, with two possible periods. A...
2.Consider the inter-temporal model of consumption studied in class, with two possible periods. Assume that initially that an individual is a saver. If the interest rate rises, which statement is false? a. The individual will never become a borrower. b.The individual will necessarily increase their savings. c.The individual must remain a saver d. The individual could increase or decrease their savings, but she must remain a saver. 4. Consider the inter-temporal model of consumption studied in class, with two possible...
A consumer's income in the current period is y=100, and income in the future period is...
A consumer's income in the current period is y=100, and income in the future period is y' =120. He or she pays lump-sum taxes t =20 in the current period and t' =10 in the future period. The real interest rate is 0.1, or 10%, per period. Also assume that this consumer likes to consume the same amount of consumption each period, that is, c = c. Questions: a) [5 points] Calculate the lifetime wealth for this consumer. b) [4...
2. Capital Tax: In our two period consumption-savings model, suppose that positive interest income in period...
2. Capital Tax: In our two period consumption-savings model, suppose that positive interest income in period 2 is taxed at rate t. Assume that Ao -0, the individual has positive endowment in both periods, and nominal prices for the good remain the same despite the ax (a) Write down the budget constraints in each period and obtain an algebraic expression for his life-time budget constraint. (b) Suppose that at the optimal choice, the representative individual is choosing not to save...
1 point What is the effect of an interest rate increase on the consumption of someone...
1 point What is the effect of an interest rate increase on the consumption of someone who was saving money before the rate increased?* First period consumption goes up, second period consumption goes down First period consumption goes down, second period consumption goes up First period consumption could go up or down, second period consumption goes up First period consumption goes up, second period consumption could go up or down First period consumption goes down, second period consumption could go...
Consider the typical individual in Fisher’s two-period model, who chooses between current and future consumption (C1...
Consider the typical individual in Fisher’s two-period model, who chooses between current and future consumption (C1 and C2) to maximize utility. Their preferences are such that the substitution effect dominates the income effect and savings increases when the interest rate rises. Draw the intertemporal budget constraint and indifference curve for this individual saver when r = 0.10. Label the utility-maximizing point by A. Which is greater, the marginal utility C1 or the marginal utility of C2? How do you know?...
When the interest rate rises, the income effect refers to a net saver's (a) inclination to...
When the interest rate rises, the income effect refers to a net saver's (a) inclination to increase consumption in the present and decrease consumption in the future. (b) inclination to decrease consumption in the present in order to increase consumption in the future. (c) inclination to save less in order to transfer some of the benefit resulting from the greater return to savings to increase current consumption. (d) inclination to save more to take advantage of the higher return to...
1. Consider the following two period consumption savings problem. A consumer cares about consumption (c and...
1. Consider the following two period consumption savings problem. A consumer cares about consumption (c and future consumption c according to Assume that U(c) is given by for some constant y. In the present the consumer chooses how much to consume and how much to save out of her income y>0 This decision is made in the knowledge that in the future she will be retired, have no income, and thus future consumption will be entirely out of savings: c)a,...
1) If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving, then a rise in the real interest rate leads to a in consumption and a_ _in saving, for someone who's a lender (saver). A) fall; fall B) fall; rise C) rise; fall D) rise, rise 2) For a borrower, an increase in the real interest rate will lead to A) higher current consumption and less...
A consumer's income in the current period is y=100, and income in the future period is y' =120. He or she pays lump-sum taxes t =20 in the current period and t' =10 in the future period. The real interest rate is 0.1, or 10%, per period. Also assume that this consumer likes to consume the same amount of consumption each period, that is, c = c. Questions: a) [5 points] Calculate the lifetime wealth for this consumer. b) [4...
2. Capital Tax: In our two period consumption-savings model, suppose that positive interest income in period 2 is taxed at rate t. Assume that Ao -0, the individual has positive endowment in both periods, and nominal prices for the good remain the same despite the ax (a) Write down the budget constraints in each period and obtain an algebraic expression for his life-time budget constraint. (b) Suppose that at the optimal choice, the representative individual is choosing not to save...
1 point What is the effect of an interest rate increase on the consumption of someone who was saving money before the rate increased?* First period consumption goes up, second period consumption goes down First period consumption goes down, second period consumption goes up First period consumption could go up or down, second period consumption goes up First period consumption goes up, second period consumption could go up or down First period consumption goes down, second period consumption could go...
When the interest rate rises, the income effect refers to a net saver's (a) inclination to increase consumption in the present and decrease consumption in the future. (b) inclination to decrease consumption in the present in order to increase consumption in the future. (c) inclination to save less in order to transfer some of the benefit resulting from the greater return to savings to increase current consumption. (d) inclination to save more to take advantage of the higher return to...
1. Consider the following two period consumption savings problem. A consumer cares about consumption (c and future consumption c according to Assume that U(c) is given by for some constant y. In the present the consumer chooses how much to consume and how much to save out of her income y>0 This decision is made in the knowledge that in the future she will be retired, have no income, and thus future consumption will be entirely out of savings: c)a,...
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