When tastes over current and future consumption are characterized by Cobb-Douglas utility functions, a borrower who has no income now and all income in the future will borrow more when the interest rate falls.

Question

Quizplus · Accepted Answer

When tastes are characterized by Cobb-Douglas utility functions, the borrower's intertemporal marginal rate of substitution is constant and equal to the interest rate. Therefore, a lower interest rate will increase the borrower's willingness to substitute future consumption for current consumption, and the borrower will choose to borrow more when the interest rate is low.

When Tastes Over Current and Future Consumption Are Characterized by Cobb-Douglas