In the case where current and future consumption are perfect complements, an increase in the real interest rate
A) involves only income effects.
B) has ambiguous effects depending on whether the substitution or income effects dominate.
C) involves only substitution effects.
D) involves a substitution effect only for lenders.
E) is relevant only for borrowers.

Question

Quizplus · Accepted Answer

When current and future consumption are perfect complements, consumers aim to maintain a fixed ratio between them. Therefore, changes in the real interest rate do not lead to substitution between current and future consumption, resulting in only income effects.

In the Case Where Current and Future Consumption Are Perfect