The person with stronger time preference for consumption should be more sensitive to interest rate change...

The person with stronger time preference for consumption should be more sensitive to interest rate change than the person with less time preference for consumption. Do you agree? Why?

Solutions

Expert Solution

No this is statement is not true, because a person with lower time preference would be more sensitive to interest rates than a person with higher and stronger time preference

Time preference is the intensity of fulfilling our desire in present than in future.

It means person with the higher time reference would look to you strongly fulfill his demand now rather than in future.While a person with low time preference would look to satisfy demand in future than present.

So show a person with a higher time preference would be very less prone to interest rate risk because he does not care about the interest rate, he is more focus at fulfilling his demand at the present and since there is a very shorter time frame the interest rate hardly affect much of his preference.

Similarly a person with lower time preference would be more prone to interest rate risk, because he wants to fulfill his demand in future so he would be highly prone to interest rate changes as there is higher duration of time and it will affect his demand to a very high extent.

So the given statement is not true because of the above stated reasons.

jeff jeffy answered 1 year ago

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