A consumer's budget constraint for two periods with positive interest rate r may be represented by the equation: A) C₁ + C₂ = Y₁ + Y₂. B) C₁ + C₂/(1 + r) = Y₁ + Y₂/(1 + r). C) C₁ + C₂(1 + r) = Y₁ + Y₂(1 + r). D) C₁/(1 + r) + C₂ = Y₁/(1 + r) + Y₂.

Question

Quizplus · Accepted Answer

The budget constraint equation for two periods with positive interest rate r is given by C₁ + C₂/(1 + r) = Y₁ + Y₂/(1 + r). Option A, C, and D are incorrect because they do not incorporate the effect of interest rate on consumption and income in different periods.

A Consumer's Budget Constraint for Two Periods with Positive Interest