The Euler equation states:
A)"The total supply of money is equal to nominal GDP divided by velocity."
B)"The real interest rate is the nominal interest rate minus inflation."
C)"A consumer must be indifferent between consuming today or in the future."
D)"The present value of government's spending must equal the present value of receipts."
E)"Consumption is a function of permanent income."

Question

Quizplus · Accepted Answer

The Euler equation is a central concept in intertemporal economics and can be stated as follows: A consumer must be indifferent between consuming today or in the future, taking into account the interest rate, the expected future income, and the degree of risk aversion. The equation derives from optimizing behavior and is often used in macroeconomic models to explain consumption and saving decisions over time.

None of the other options correctly describe the Euler equation. Option A is the quantity theory of money, which relates the money supply to nominal GDP and velocity. Option B describes the Fisher equation, which relates the nominal and real interest rates to inflation. Option D refers to the government budget constraint, while option E is the permanent income hypothesis.

The Euler Equation States