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 a substitution effect only for lenders.
D)is relevant only for borrowers.
E)involves only substitution effects.

Question

Quizplus · Accepted Answer

When current and future consumption are perfect complements, individuals aim to maintain a fixed proportion between them. An increase in the real interest rate does not change this proportion, as the decision is driven by the desire to keep the consumption bundle constant, leading to income effects rather than substitution effects.

In the Case Where Current and Future Consumption Are Perfect