Answer to Question #67364 in Microeconomics for sophia

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 perios (t+1) and survive on interest income.explain the impact of an icrease in interest rate on consumption during time period ta

Answer 1

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.