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Use the "Theory of intertemporal choice" model in order to analyse the effect of the following...

  • 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.
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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.

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