The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as $C _ { 2 } = Y _ { 1 } ( 1 + r ) + Y _ { 2 } - ( 1 + r ) C _ { 1 }$ ,if the interest rate were to rise the budget line would
A)shift to the left in a parallel fashion
B)shift to the right in a parallel fashion
C)rotate counter-clockwise pivoting on Y1,Y2
D)rotate clockwise pivoting on Y1,Y2

Question

Quizplus · Accepted Answer

When the interest rate (r) increases, the slope of the budget line, which is determined by $1 + r$, becomes steeper. This results in a clockwise rotation of the budget line around the point where current income (Y1) and future income (Y2) are on the axes, as the cost of consuming today relative to saving and consuming tomorrow increases.

The Two-Period Budget Line for Incomes Y1 and Y2 and Consumption