# Answer to Question #66878 in Macroeconomics for himani

Question #66878

Consider the overlapping generations model where each member lives for two time

periods ‘t’ and (t+1). Assume that individuals work in time period ‘t’ and earn wage

income, while they do not work in time period (t+1) and survive on interest income.

Explain the impact of an increase in interest rate on consumption during time period ‘t’.

periods ‘t’ and (t+1). Assume that individuals work in time period ‘t’ and earn wage

income, while they do not work in time period (t+1) and survive on interest income.

Explain the impact of an increase in interest rate on consumption during time period ‘t’.

Expert's answer

If individuals work in time period ‘t’ and earn wage income, while they do not work in time period (t+1) and survive on interest income, then the impact of an increase in interest rate will decrease consumption during time period ‘t’, because it will be better for them to save more than to spend.

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