If a consumer views a unit of consumption in period 1 as a perfect substitute (one for one)for a unit of consumption in period 2 and if the real interest rate is positive, the consumer will
A)consume only in period 1.
B)consume only in period 2.
C)consume equal amounts in each period.
D)consume more in period 1 than in period 2 if income elasticity exceeds 1, otherwise consume more in period 2 than in period 1.
E)equalize expenditures but not consumption in the two periods.

Question

Quizplus · Accepted Answer

If the real interest rate is positive, saving money (or deferring consumption) from period 1 to period 2 will yield a positive return. Therefore, if a consumer views consumption in both periods as perfect substitutes, they would prefer to consume in period 2, where their purchasing power is higher due to the interest earned on saved money.

If a Consumer Views a Unit of Consumption in Period