Question

• Use the "Theory of intertemporal choice" model in order to analyse the effect of the following on consumption and saving:
  1. A decrease in disposable income at period 2.
  2. An increase in the interest rate for a consumer with negative saving.
  3. A decrease in the interest rate for a consumer with positive saving.

Answer 1

​​​​​​So, a decrease in disposable income of period 2 leads to decrease in both current and future consumption. Savings will also increase.

An increase in the interest rate when consumer have negative saving (i.e) he is a borrower leads to decrease in his current consumption and increase in saving.

A decrease in the interest rate when consumer have positive savings (i.e) he is a lender leads to decrease in his future consumption only.