Assuming no kinks in indifference curves and assuming our usual assumptions about tastes hold, someone who currently neither saves nor borrows will begin to borrow when the interest rate falls.

Question

Quizplus · Accepted Answer

According to the usual assumptions of diminishing marginal utility and time preference, a decrease in interest rate makes present consumption relatively more attractive than future consumption, causing individuals to increase current consumption and therefore borrow more. This behavior is reflected in the downward slope of the demand curve for credit.

Assuming No Kinks in Indifference Curves and Assuming Our Usual