Question

answer in detail.. this question consists of 20 marks
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 period (t+1) and survive on interest income. Explain the impact of an increase in interest rate on consumption during time period ‘t’.

Answer 1

With the rising interest rates in the period (t + 1), consumption in period t will decrease. This is due to the fact that individuals do not work in period (t + 1) and have additional income. Therefore, individuals receive income only in the period t. This leads to a redistribution of money tspozhyvannya in period (t + 1) increases with increasing interest rates, and then consumption in period t decreases.