Author Question: Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods ... (Read 109 times)

meagbuch · **on:** Jul 1, 2018

Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (C1 and C2). Any funds not spent in period 1 will earn interest (at the rate r), which will increase purchasing power in period 2 . Consider four possible reactions to an increase in r: I. C1 increases. II. C1 decreases. III. C2 increases. IV. C2 decreases. Which of these is consistent with the hypothesis that both C1 and C2 are normal goods?
a. I, II, III, and IV.
b. I, II, and IV, but not III.
c. I, III, and IV, but not II.
d. II and III, but not I and IV.
e. I, II and III, but not IV.

Question 2

A rise in the real interest rate r
a. creates income and substitution effects that reduce C0.
b. creates income effects that reduce C0, substitution effects that increase C0.
c. creates income effects that increase C0, substitution effects that reduce C0.
d. creates income and substitution effects that increase C0.