Suppose consumption in year 2 (C₂)is on the horizontal axis and consumption in year 1 (C₁)is on the vertical axis.An increase in the interest rate: A)makes borrowers better off and lenders worse off. B)causes more people to shift their consumption from year 2 to year 1. C)causes the budget line to rotate outward along the horizontal axis. D)will reduce savings in year 2.

Question

Quizplus · Accepted Answer

An increase in the interest rate makes future consumption cheaper relative to present consumption, causing the budget line to rotate outward along the horizontal axis, as people can achieve more future consumption for the same amount of present consumption.

Suppose Consumption in Year 2 (C2)is on the Horizontal Axis

Suppose Consumption in Year 2 (C₂)is on the Horizontal Axis