Answer to Question #64317 in Microeconomics for niharika

Question

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’.

Answer 1

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.