An individual is considering consumption in two periods.He has decided to borrow $1,000 in period 1,given his endowment and the interest rate.Other things remaining the same,if the interest rate increases,he will:
A)borrow less than $1,000.
B)continue to borrow $1,000.
C)borrow more than $1,000.
D)borrow more or less depending upon whether or not the substitution effect of the change is greater than the income effect.

Question

Quizplus · Accepted Answer

If the interest rate increases, the cost of borrowing increases, so the individual's demand for borrowing decreases. Therefore, he will borrow less than $1,000.

An Individual Is Considering Consumption in Two Periods