Question #64350

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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’.

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’.

Expert's answer

With the rising interest rates in the period (t + 1), consumption in period t will decrease. This is due to the fact that individuals do not work in period (t + 1) and have additional income. Therefore, individuals receive income only in the period t. This leads to a redistribution of money tspozhyvannya in period (t + 1) increases with increasing interest rates, and then consumption in period t decreases.

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