Answer to Question #64317 in Microeconomics for niharika

Question #64317
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’.
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Expert's answer
2016-12-28T11:30:07-0500
If interest rates rise, under the influence of consumption in period t decrease. Indeed, with an increase in interest rates of consumption in period (t + 1) will increase, thereby consumption in period t decrease. This is caused by the lack of income in period (t + 1) at the overlapping generations model.

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