show the effect of a decrease in the interest on current and future consumption for a...

show the effect of a decrease in the interest on current and future consumption for a lender and borrower. What is the overall effect of a decrease in the interest rate on current consumption?

Expert Solution

Decrease in r for lender: substitution effect- since relative price of future consumption is higher , present consumption will be increased, future consumption will be decreased.

Decrease in r for lenders: income effect- since consumers are poorer and goods are normal, present and future consumption will be decreased.

That is for lenders current consumption depends on relative weight of IE and SE. Future consumption will be decreased.

Decrease in r for borrowers: substitution effect- since the relative price of future consumption is higher, current consumption will be increased and future consumption will be decreased.

Income effect: since the borrowers are richer and goods are normal, current and future consumption will be increased.

So total effect of borrowers , current consumption will be decreased and future consumption is ambiguous.

So overall impact on current consumption depends on lenders' weight of IE and SE.

if IE>SE present consumption will be decreased

if IE<SE present consumption will be increased.

Rahul Sunny answered 2 years ago

Show the effect on price (increase, decrease, no effect): Show the effect on price (increase, decrease,...

Show the effect on price (increase, decrease, no effect): Show the effect on price (increase, decrease, no effect) for each of the following situations under three form of market efficiency Situations Situations Weak Semi-Strong Strong The WSJ publishes that Landmark Inc. declared a dividend of $1 per share Landmark Inc. board members decide in a closed door meeting to open a new factory in Taiwan Your broker in NYSE tells you that Landmark Inc. CEO is going to declare retirement

6. Show the effect on the equilibrium interest rate of a decrease in the price level....

6. Show the effect on the equilibrium interest rate of a decrease in the price level. Show using the graph for the nominal money market. Clearly state what happened to the equilibrium interest rate. (5 pts.)

In the neoclassical consumption model with log utility functions for current and future consumption, an increase...

In the neoclassical consumption model with log utility functions for current and future consumption, an increase in the interest rate will increase the growth rate of consumption. true or false and why

Suppose a consumer who has a marginal rate of substitution of current consumption for future consumption...

Suppose a consumer who has a marginal rate of substitution of current consumption for future consumption that is a constant, b. Determine how this consumer’s choice of current consumption, future consumption, and savings depends on the market real interest rate r, and taxes and income in the current and future periods. Show this in diagrams.

Is the companies interest in holding IPOs likely to increase or decrease in the future?

Q6. There is a decrease in AD. Show on an AD/AS diagram the effect on output...

Q6. There is a decrease in AD. Show on an AD/AS diagram the effect on output and prices in the short-run. State the effect on prices, output, unemployment, and wages next to the diagram. Assume we start at Qs Q7. There is a decrease in the cost of an input into the production of many goods. Show on an AD/AS diagram the effect on output and prices in the short-run. State the effect on prices, output, unemployment, and wages next...

: Suppose that the representative consumer’s preferences over current consumption (C) and future consumption (C 0...

: Suppose that the representative consumer’s preferences over current consumption (C) and future consumption (C 0 ) are given by the following utility function U(C, C0 ) = CC0β The market real interest rate is denoted by r and β > 0. 1. Write down the consumers’ budget constraint for the current and future period. 2. Using the equations in part (1), obtain the inter-temporal budget constraint. 3. Set up the consumer’s optimization problem using the Lagrangian approach. Next, derive...

Graphically analyze the effect of an exogeneous decrease in the interest rate on: (a) The utility...

Graphically analyze the effect of an exogeneous decrease in the interest rate on: (a) The utility of borrowers and lenders (b) The present wealth of borrowers and lenders (c) The investment in real assets

Decomposition of the effect of a wage decrease on labour supply Bob’s preferences over consumption (c)...

Decomposition of the effect of a wage decrease on labour supply Bob’s preferences over consumption (c) and leisure (r) are represented by the following utility function: u(c, r) = c^(0.6)r^(0.4). Suppose that Bob is endowed with $100 and 50 hours (per week) to allocate between leisure and work. Denote the price of the consumption good by p and the wage by w. Express mathematically all the constraints faced by Bob. Draw Bob’s feasible set. Derive Bob’s (gross Marshallian) demands for...

Explain the terms “wealth effect” and “interest rate” effect and describe their influence on Consumption. Provide...

Explain the terms “wealth effect” and “interest rate” effect and describe their influence on Consumption. Provide examples and explain your answer.

Question