In the two-period model of the economy,
A) borrowing rates of interest are greater than lending rates of interest.
B) borrowing rates of interest are less than lending rates of interest.
C) there is only one real interest rate.
D) borrowing rates of interest are equal to lending rates of interest.
E) there is only one nominal interest rate.

Question

Quizplus · Accepted Answer

In the two-period model of the economy, borrowing rates of interest are equal to lending rates of interest. This is because the model assumes perfect capital markets, where there are no transaction costs or information asymmetries that would cause different rates for borrowing and lending. Therefore, the interest rate is the same for both borrowing and lending.

In the Two-Period Model of the Economy