Use the intertemporal budget constraint — equation (2 ) — to explain how an increase in the real interest rate causes two distinct effects, an income effect and a substitution effect,
and how those effects differ depending on whether the consumer is a saver or a borrower.
An increase in the real interest rate affects the first term on the RHS. For savers, the term is positive: the higher interest rate increases the value of lifetime resources, enabling more consumption in either period. For borrowers, the term is negative, so the higher interest rate reduces the value of lifetime resources. This is the income effect. For both savers and borrowers, the higher interest rate (because it is multiplied by ) makes current consumption relatively more expensive compared to future consumption. That is, reducing current consumption by one unit at the higher interest rate enables a larger increase in future consumption than at a lower interest rate. This is the substitution effect.
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When disposable income is zero, consumption expenditure is
A) also zero. B) negative. C) equal to induced consumption expenditure. D) equal to autonomous consumption. E) None of the above answers is correct.
If the U.S. government imposes a tariff on imported steel, who else besides U.S. steel producers gains from the tariff?
A) U.S. steel consumers B) the U.S. government C) U.S. importers of steel D) foreign exporters of steel E) the foreign government
If firms differ in terms of their technologies, a drop in demand will cause a long run decrease in output price.
Answer the following statement true (T) or false (F)
Suppose Zia spends her time picking berries and apples. Her production set is described by the equation , where is the number of berries and y the number of apples. Which of the following statements will be true?
a. 25 apples and 10 berries is achievable but inefficient. b. 10 berries and 2 apples is efficient but unachievable. c. 20 apples and 5 berries is an inefficient level of production. d. 30 berries and 5 apples is an efficient level of production.