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In: Economics

Consider an individual who lives for two periods t = 1, 2. Suppose she is in...

Consider an individual who lives for two periods t = 1, 2. Suppose she is in debt and, given an interest rate r, she optimally decides to consume (C1;C2). Now, imagine that the interest rate r falls. What do you expect to happen to her optimal consumption in the two periods? Explain your answer referring to income and substitution e§ects, to the budget constraints, and the Euler equation.

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Rahul Sunny answered 2 years ago
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