Consider another consumer that lives for two periods and chooses consumption in period 1 and in...
Consider another consumer that lives for two periods and chooses consumption in period 1 and in period 2. At the current interest rate of 10% the consumer lends $10,000. If the interest rate increases to 30%, what will happen to consumption in period 1 (current consumption)?
(a) Consumption in period 1 increases unambiguously.
(b) Consumption in period 1 decreases unambiguously.
(c) Consumption in period 1 increases only if the substitution effect dominates the income effect.
(d) Consumption in period 1 could either increase or decrease (uncertain).
Homework Answers
Answer is option D)
For a saver, if r rises, then Consumption in period 2 will surely rise.
But C1 can rise or fall
If income effect is stronger, then C1 will rise
If Substitution effect is stronger , then C1 will fall
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